It has been said by many leading experts that more changes have occurred in commercial real estate financing in the last 5 years than the previous 50 years. Nowhere have these changes been more evident than in the “Small Balance” arena (Loans between $100k – $5 Mil).
Loan programs such as “stated income” (meaning no business/personal tax returns or personal financial statement required), 30 year fixed and 90% non SBA financing have popped up and are turning heads – both traditional bankers and borrowers that are enjoying additional loan options never before seen.
How and Why? Secondary market… While the residential side of the business embraced forming a secondary market in the 80’s leading to great efficiency’s and standardizations within the industry the commercial side floundered and continued to portfolio loans (meaning basically that the banks lent their own money and held onto the loan for the long term).
Essentially the secondary market creates more diversification and thus less risk for the investors (like pension funds) that hold onto the debt long term. Rather than having a individual loans in a specific geographic area the investors basically pools together 100’s of individual loans (pools are often in the $100 of millions) all across the country and spread out with different building types, i.e. retail, office, multifamily etc. creating even more diversification.
While the troubles in the residential subprime market have concerned some that potential spill over will slow down development on the commercial secondary market, many experts argue that underwriting fundamentals are still in place – despite the creative loan programs that have been created. In a recent article published in Commercial Mortgage Insight the current national commercial delinquency rate on the secondary market dropped to .27% down from .33% one year ago.
What’s to come? We will see but increased competition between lenders/banks will probably continue to drive down margins and spur new competitive loan programs that will make owning commercial real estate easier (slightly) and help more potential owners become actually owners.