DALLAS—At the start of the Great Recession, the credit markets seized up and cash flow ground to a halt. As anyone involved with commercial real estate at the time remembers, obtaining loans to buy, or especially build, was nearly impossible. So says Axiometrics Inc.’s Amy Sorter.
Though government agencies financed apartment activity, much of the sales activity within the commercial real estate sector ground to a halt, she says in a recent blog post. Even REITs and pension funds were wary of CRE investments.
What a difference five years makes.
“These days, lending competition over commercial real estate projects is fierce, with banks competing against other institutions (CMBS and life companies, to name two) for the right to finance. This competition, of course, is leading to better deals for the borrower,” she says.
But Sam Chandan, president and chief economist of Chandan Economics said the current state of lending exuberance needs to be regarded with caution.
During his presentation entitled “Momentum and Risk” at the recent Dallas/Fort Worth Real Estate Research Forum and Dallas/Fort Worth Association of Business Economists luncheon, Chandan noted that competition among lenders is leading to increased risk, albeit on a small scale. Still, “if we’re growing the lending,” he observed, “what about the quality of the borrower?”
In an interview following his presentation, Chandan noted that many loans are being underwritten toward anticipated cash flow, rather than historical norms. Furthermore, lenders are also competing on structures; one example of this is longer interest-only periods.
Another interesting factor he pointed out both during his presentation and following interview was that growing competition means more banks have returned to construction financing, many sooner than they would have liked. “Construction is relatively uncontested from a lending point of view,” Chandan noted, though added that the construction loan terms tend to be fairly conservative. Still, “the cautionary note arises where banks are looking at construction finance because of competition for permanent lending,” he commented.
To read more about Sam Chandan’s thoughts, and to see the full post, click here.