Financing is vitally important to the commercial real estate market. It is also an indication of the general confidence that the lending community has about the overall economy, and about whether or not both people and companies will have the ability to repay their loans.
Available financing also has a direct impact on the market value of commercial properties. When a property is for sale for $1,000,000.00, and a potential purchaser can buy the property with just 10% down, there will be more people interested in purchasing the property because they need just $100,000.00 to do so. But if financing was extremely tight and the property had to be purchased for all cash, there would be a lot less people who would have the $1,000,000.00 in cash needed to purchase it, and many of the potential purchasers would then disappear. In a situation like this, all cash buyers would be hard to come by, and they’d demand to buy the property for less money-for a price of maybe $850,000.00. So this then shows how the availability of financing alone can impact the value of commercial properties.
When the financial crisis hit us in 2008, the amount of available financing dried up. But for the past several years now financing has been loosening-up once again, and people are beginning to feel more confident about the economy. People who couldn’t obtain financing 2-4 years ago can now get it, and this has been increasing the number of buyers in the market.
So what can we expect to see with the amount of available financing throughout the rest of 2014? It’s very likely that financing will become easier for more people to obtain as the year progresses. The economy is now moving in the right direction, the financing market has been improving, and there is very little suggesting that the commercial real estate market is going to put the brakes on, reverse itself, and begin slowing down. The commercial real estate market may not be completely on fire, but it’s better than it was just several years ago, and people are feeling more positive about the future.
Commercial Mortgage-Backed Securities (CMBS) have now become an important source of funding for commercial real estate financing. But after the financial crisis hit us in 2008, the funding from these securities dried up dramatically. However, the trend has now been reversing itself, and it has become more positive within recent years. In 2012, for example, the total amount of CMBS securities issued was $48 billion, and in 2013 this amount rose to $75 billion, representing the greatest amount of CMBS securities issued since 2007, which is an extremely positive sign. In addition, according to a study conducted by the Urban Land Institute and Ernst & Young, the total amount of CMBS securities issued in 2014 may reach $88 billion, and grow to exceed $100 billion in 2015.
So financing for commercial real estate is definitely moving in the right direction. This arena has improved substantially since the financial downturn of 2008, and it is projected to improve even more.
As financing continues to improve, this helps to support both the value and the appreciation of commercial properties, as it allows more buyers to then enter into the market, submitting multiple bids and competing against each other to own the same commercial properties.