In the third installment of our four-part series on capital and commercial real estate, we spoke with industry experts to gain insights into what they are looking for when financing a deal. This article follows two previously published pieces: “Understanding Capital Creativity” and “Capital Markets: The Rearview Mirror and the Road Ahead.”
We reached out to Jonathan Lee, T.R. Hazelrigg IV, Brian Heflin, Ivan Kustic, Gary Bechtel, Jeff Salladin,and Jon Pharris for their expert opinions on current lending trends in commercial real estate.
Amidst recent news about a lack of available capital or exorbitant costs associated with it in the investment world of commercial real estate lending , it’s easy to assume that securing funding is an insurmountable task. While it’s true that obtaining debt has become more challenging than before due to changing market conditions , there are still opportunities available for borrowers who can demonstrate strong potential returns.
Accordingly,”loans are now being scrutinized more closely,” notes Avatar Financial Group’s T.R.Hazelrigg IV . He emphasizes that lenders today require solid assurances regarding risk management from borrowers seeking funds.”The key is substance over form; money will be accessible only if projects have high quality standards backed by experienced sponsors willing to invest their own equity,” he adds.
One crucial aspect lenders consider when evaluating loan applications is the type of asset involved – as Colliers Structured Finance Group ‘s Jonathan Lee explains:”Banks and insurance companies aren’t adequately compensated enough these days unless product types offer consistent cash flow.” In other words,the most attractive assets remain multifamily properties followed by industrial ones despite concerns about maturing debt (in case of multifamily) or rising vacancy rates/overbuilding (for industrial).
On another note,Gary Bechtel from Red Oak Capital Advisors observes how urban office building owners struggle while suburban offices perform reasonably well.However,when it comes to securing financing for these properties,”certain asset classes are going to be very challenging and may require significantly more structure, assuming they have a compelling story,” he says.
In this regard,MetroGroup Realty Finance’s Ivan Kustic points out that non-traditional assets can appeal to lenders. He cites examples of his company representing a life insurance firm with 50 years of market experience which has financed car dealerships,a storage yard,a cement plant,and even office buildings in Chicago and New York in the last 18 months.”Some lenders are willing to finance unconventional properties if there is an interesting story behind them,stability in tenancy,and experienced property operators involved,” Kustic remarks.
Meanwhile,the retail sector has caught the attention of Revere Capital’s Jeff Salladin who notes how it was overbuilt during late-20th century but underbuilt after the Great Financial Crisis.”I think we’ve already seen much of the ‘Amazon Effect’ reflected in today’s market.There are still plenty reasons for shoppers to visit well-managed retail spaces,I see opportunities there too.”
Another trend among borrowers is providing more equity while seeking loans as leverage ratios continue decreasing. Red Oak Capital Advisors’ Gary Bechtel explains how many current loans (both maturing permanent ones or new acquisitions) now demand higher borrower equity than before.Private lenders often provide such funding or borrowers seek rescue capital on their own terms.
Furthermore,as Colliers Structured Finance Group ‘s Jonathan Lee states,lenders will likely offer higher leverage based on updated valuations once stalled loans start moving forward again.However,this process remains complex at present due partly because interest rates remain low.Lee believes that if borrowing costs decline further alongside resolving distressed assets,it could lead “to a tremendous resurgence”of available capital for investment purposes .
To sum up,borrowers should note that despite tighter lending conditions nowadays,capital remains accessible.Nevertheless,lenders prefer larger borrowers with strong balance sheets over smaller developers or investors who lack such financial backing,as CapRock Partners’ Jon Pharris notes:”Lenders are more accommodating to bigger players and less forgiving towards those without robust financials.”
