Tight Lending Standards Hindering Commercial Real Estate Recovery
Although commercial real estate markets showed signs of recovery in 2011, commercial lending standards have tightened in the past year for small businesses and scuttled a major portion of contracted transactions for smaller properties, according to the National Association of Realtors® annual Commercial Real Estate 2012 Lending Survey.
Lawrence Yun, NAR chief economist, said there is a significant split in commercial lending depending on value. “This is very much a tale of two markets. There have been notable improvements in capital for large commercial transactions valued at $2.5 million or higher, but there remain significant challenges for small business,” he said.
“Our Realtor® members typically are involved in helping commercial clients with purchases under $2 million, where a lack of capital has caused two out of three respondents to report deals have fallen through. Given that most jobs are created through small business, the lack of capital is hurting small businesses and the overall economic recovery.”
According to Real Capital Analytics, more than 13,000 major properties valued at $2.5 million or higher traded hands in 2011. Sales volume increased 51 percent over 2010 to $205.8 billion, with the lion’s share of lending funds coming from big banks. Other funding sources include insurance companies and institutional investors.
By contrast, the NAR survey shows that small business transactions rely heavily on smaller regional and local banks, and small private investors, for lending capital.
Respondents indicate nearly 30 percent of smaller commercial properties are purchased with cash, reflecting the tight credit environment, and some are seller financed. “When credit is tight, cash is king,” Yun added.
The most common types of property transactions referenced in the survey were multifamily, land, warehouse, suburban office and retail strip centers. Other property types include industrial flex space, central business district office, freestanding retail, and restaurants.
Realtors® report the system is clogged with property that must be sold or refinanced, which is significantly impacting the recovery. Long-time investors who never had a problem getting a loan in the past are now being declined.
More than half of respondents say lending is just as stringent as a year ago, while 23 percent say it is more stringent; 20 percent say it is less stringent but not near historical averages. Members also complained about banks being over-regulated, and refinancing being denied due to stringent internal lender underwriting requirements or low appraisal valuations.
Thirty-six percent of Realtors® said clients used the Small Business Administration commercial refinance program, but of those who didn’t, 45 percent said it was due to burdensome application and reporting requirements.
The Commercial Real Estate 2012 Lending Survey is published by the NAR Research Division for the commercial community. In April 2012, a random sample of 32,459 Realtors® with an interest in commercial real estate was invited to complete an online survey. A total of 474 responses were received, for an overall response rate of 1.46 percent.
NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR. The NAR commercial components include commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and the NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute,
Society of Industrial and Office Realtors®, and Counselors of Real Estate.
Approximately 78,000 NAR and institute affiliate members specialize in commercial brokerage and related services, and an additional 232,000 members offer commercial real estate services as a secondary business.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.