In Sept. 2008, the lending world shut down. In 2011, it started to claw its way back.
Toward the end of 2011 and the beginning of 2012, money began to flow more freely.
“There are clearly loans that are happening from multiple lenders at rate and loan values that are as good as if not better than they were before,” says Terry Coyne, SIOR, CCIM, an executive vice president with Grubb & Ellis. “The ability to get money is real and you can get great interest rates and terms.”
Smart Business spoke with Coyne about how the lending market has changed and how to secure financing for a real estate deal.
What does today’s lending market look like?
Large national banks are still at the stage in which they are dipping a toe in the pool, but the local banks, which lend to the people they know in their communities, are making loans.
Not only are they making loans, but you are seeing interest rates of less than 5 percent and amortizations of 20 years if not 25. The key is there are multiple banks bidding on deals.
Why does having multiple banks bidding change the picture?
Leasing is a form of financing, and so the leasing market for real estate was very hot because you couldn’t get loans to make purchases. Typically our market is 60 percent owner-occupied, user buildings and 40 percent leasing. That ratio flip-flopped over the last two or three years where 70 percent of deals were leases and 30 percent were purchases.
One bright spot through this period: President Obama did make the U.S. Small Business Administration give loans. The SBA used to have a limit of $1 million per loan; the new limit has been raised to $5 million. Most loans that have happened in the past two or three years are SBA, government-backed loans. You are still seeing SBA loans, but you are also seeing lenders keep the whole loan on their balance sheet and assume all of the risk. The government involvement was a good bridge for a year or two, because, while the leasing market was great, the sales market was horrible. Now with loans being made, the sales market is coming back in a hurry.
With interest rates low, this should be a great time to buy. You now can get loans to buy in a market where buying has been so slow for the last few years.
What should potential buyers do to maximize their chances of getting financing?
The local banks in your area would be the first logical call. Don’t be afraid to approach your lender and ask for a loan. In the past, ‘loan’ was a four-letter word. Some people have been so worried about loans they’ve stopped thinking about it all together.
Why are local banks better bets for financing than large national banks?
The local banks didn’t have the exposure to the broader market like some of the national banks did. These local banks stuck to what they do: make loans to local businesses that they know. A lot of the larger banks were making loans on larger portfolios in markets that they didn’t know.
Banks that didn’t do that are doing well.
Right now, banks need to get money out the door. Deposits are a liability to banks, not an asset. They take your $10,000 deposit and pay you 0.5 percent. Then they have to loan it out to someone else at a number higher than that. Because deposit rates are low, interest rates on loans are very low. I’ve seen interest rates in the 4 percent range for investor-owned industrial buildings. It’s not just the owner/user market; investors are able to get loans as well.
How has the lending environment affected the real estate market?
In the past two years it made it hard to sell properties because buyers had trouble getting loans. It was a good time to be a landlord, because there was more action for leasing than there was for selling. Now, I’m seeing a great deal of pent-up demand from the last two years. You’re seeing this pent-up demand being released at the same time that loans are easier to get. Together those two things are creating a situation where there are a lot of buildings going off market and being sold.
From 2008 to 2011, the number of sales has gone up every year — from $452 million in sales in 2008 for an eight-county region to $724 million in 2011. That’s an increase of more than 60 percent.
Will there be any changes in the future?
What you will see at the end of 2012 and the beginning of 2013 is a normalized lending environment. Right now, it is a novelty and people are excited about it. Soon, it will be back to normal.
You need loans; they are the oxygen of business. When lending stops it becomes hard for these companies to breathe.
If you are looking to buy and use it yourself, don’t wait. The market still favors the buyer, but it won’t for long. If you wait you will see price increases, and it will become a seller’s market shortly. It’s not there yet, but it’s getting there.
Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at firstname.lastname@example.org or (216) 453-3001.