It’s a good time to refinance a commercial real estate loan or purchase a property.
“The market has become more competitive. The big retraction of lender funds in 2008 and 2009 that resulted from increased reserve requirements and unfavorable market conditions has flipped. More banks, insurance companies and other financing sources are back in the mix and looking to lend as the economy continues to improve,” says Kimberly Rysyk, a senior vice president in the Real Estate Lending Division at Bridge Bank.
Smart Business spoke with Rysyk about the state of the lending market and opportunities that are available.
How is the current commercial real estate lending market?
It’s favorable for borrowers, as lending sources increase and interest rates remain low. Many banks have re-entered the market as their financial positions have increased along with the economy. The increase in sources has created competition, resulting in a decrease in spreads. This has translated into a drop in rates. The bottom line is that there are more lenders looking for the same deals.
What about lending for new projects?
Finding lending sources for new projects remains difficult but improved through the latter half of 2012. Cash equity of 25 to 35 percent is standard and projects with higher risk may approach 50 percent. Certain housing markets warrant new construction as demand for new housing and rents increase. Lenders are interested in those builders and developers who have been able to sustain themselves through the recession and have cash to invest. There is financing out there for speculative construction as well, provided the cash equity is sufficient and the buyer is financially strong.
For owner-occupied businesses it can make sense to find property that’s not necessarily in a top location, but in a place where they can have a brand new building suited to their specific needs that works based on debt coverage, cost of the project and cost of the land.
Is it a good time to invest in such properties?
Historically low interest rates and real estate prices still depressed from the Great Recession have created some opportunity. There has also been a slow but steady improvement in the labor market and a leveling of vacancies and rents, which are positive signs for the economy. This is a good time to invest in commercial properties if you know your market.
In San Francisco, for example, payroll tax incentives for businesses that relocate are making some areas attractive that previously were considered B-rated. This has led to big companies, such as Twitter, Zynga and Salesforce.com, to relocate to areas that were not considered desirable but are now looking up. Other companies or investors can take advantage of the depressed values here, refurbish or rebuild, and greatly affect the end value of the project. There are lenders out there who can recognize the end value and will lend on the resultant cash flow, rather than the current depressed value.
What should you consider when choosing a bank?
Strength and longevity are key. Has the bank been in the commercial real estate business through the downturn? Were they able to navigate changes in the market? An experienced banker will look at your past and future projections, uncover the pros and cons, and help you determine the best solution for your needs, whether it be building new, renovating an existing building or refinancing your current debt.
What concerns do you have for the future?
A significant swing in interest rates is concerning. Properties that were refinanced at extremely low rates may have difficulty finding refinancing sources at maturity. This concern would be heightened if the facility were not amortized or if property values do not rise sufficiently. The European financial crisis, for example, has had an effect on companies that do business on a global scale. This type of uncertainty affects the stock market, which has a strong bearing on the continued strength of the economy. Finally, federal regulators are considering increasing the reserve requirement for real estate loans. A significant increase could chase many lenders out of the market once again.
Kimberly Rysyk is senior vice president, Real Estate Lending Division, at Bridge Bank. Reach her at (408) 556-8392 or [email protected]
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