Lenders Return to Commercial

It took a while, but commercial real estate transactions are finally gaining traction. REALTORS® who specialize in commercial deals are reporting a solid 35 percent increase in transactions over the past 12 months. Recovery time following a recession is typically 18 to 24 months, but this cycle lasted four years. It was a hard punch. Business has bounced back and, fortunately, should remain brisk.

The improving economy and an improved lending environment are the primary reasons for the gains. A net increase of 12 million jobs from the low point five years ago has boosted demand for office, retail, warehouse, and industrial spaces. That’s helping to push down vacancy rates and push up rents in all sectors.

But it is the second factor—lending—that is making the biggest difference. In our latest survey of commercial practitioners, 42 percent said they’re seeing credit easing, while only 20 percent said they’re seeing stricter conditions. The responses are vastly different from the last few years, when nearly all respondents reported greater difficulties in obtaining credit to get their deals done.

And yet hurdles remain. A large number of commercial practitioners continue to see their clients’ deals hamstrung by tight credit requirements (albeit less tight than what they previously experienced). Of those whose clients managed to obtain financing, more than half had to put down at least 30 percent.

There’s a reason for these challenges. Most practitioners are engaged in deals of $1 million or less, and their clients rely mostly on lending from local community banks, not from Wall Street or large financial institutions. Commercial loans don’t carry government backing—regardless of their size. Therefore, lenders proceed with extreme caution.

That absence of government guarantees is why it took so long for the sector to recover. This is a good reminder of the importance of the FHA and Fannie Mae and Freddie Mac regarding credit flow as well as the advocacy role of the National Association of REALTORS®. Think of how much more quickly the residential sector recovered after the slowdown—thanks to government backing of those federal entities. Yes, commercial lending has faced a slower recovery, but with community lenders now getting back into the sector, it’s a good bet we’ll see continued strengthening.