It is a mark of the uneven nature of the economic recovery that small and medium sized commercial real estate borrowers, unlike their larger brethren, are still having trouble securing loans from banks, as any number of recent statistics will show. Or is it? Truth is, the CRE finance ecosystem has never been designed or optimized with the $10 million to $5 million to most certainly the $2.5 million or less borrower in mind. It was only at the height of last real estate cycle—when lenders were practically begging to give money away—that such products as small loan CMBS were part of the landscape, and a small part at that. Now, like then, that is starting to change but as it does lets hope the industry figures out how to make the necessary structural changes so this flow – this relatively small flow – will stay steady.

First, though, the statistics. Yes, liquidity is improving for CRE borrowers, at least those with fairly decent credit profiles.

The Federal Reserve’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices, released last month, reported that “a modest net fraction of domestic banks reported easing their standards on CRE loans.” The Fed doesn’t break out lending between small and large companies for CRE, which is a shame because it does so for commercial and industrial loans. The National Association of Realtors does, however, and it has been beating this particular drum for some time. Its annual Commercial Real Estate 2012 Lending Survey, released last month, found that commercial lending standards have tightened in the past year for small businesses and these tightened standards scuttled a major portion of contracted transactions for smaller properties.

Commercial clients that made, or tried to make, purchases under $2 million eventually found that they couldn’t close the deal because of a lack of capital.  

I have no doubt this is the case, but I would hesitate to ascribe this strictly to the economy. As noted above lenders have always been stingy with small businesses looking for real estate loans for various reasons, starting with the fact it is just as efficient, or inefficient as the case may be, to make a large loan as it is a small loan, so why not make the large loan and reap greater rewards? That thinking changed in the mid 2000s when the ROI for small business loans, including small loan CMBS, became attractive enough to attract lending.

It appears we have reached that point of the cycle again, or at least we are about to get there, even if industry surveys aren’t capturing it yet.

We are seeing more players target this space, presumably not for altruistic reasons. In March, CWCapital launched a new small loan lending platform, offering eligible borrowers access Fannie Mae programs designed specifically for loans up to $5 million. (Okay it is multifamily but still, it is also aimed at the small small-sized borrower).

Late last year, in the Washington, DC-area NVCommercial launched a new fund with the goal of making real estate loans to small businesses.

Stephen Cumbie, one of the principals told me at the time that the market has reached a point where returns for smaller-sized projects are good enough to justify the “inefficiency” of small business lending.

Investors should be able to expect a 15% IRR on the fund, he said. Hopefully as lenders such as CWCapital and NVCommercial ramp up, the next NAR report will have some better news for SMBs. It won’t be great, though, mainly because for SMBs it never is.