Commercial real estate financing is an extremely important component that contributes greatly to the overall health of the commercial real estate market. When good, solid commercial real estate financing is available, this helps to support commercial real estate property values, as more people can then afford to buy properties, which then increases the total amount of sales in a given area.
Keeping this in mind, for example, more people will want to buy a $1,000,000.00 building when they can do it for 30% down, as opposed to having to pay all cash for it. This is the same reason why automobile manufacturers provide their own financing to customers, because it gets people to buy more cars when they can do it with no money down.
We’ve been fortunate in recent years because commercial real estate financing has become more readily available. When the most recent economic downturn hit us, commercial real estate financing for the most part disappeared, making the economic downturn that much harder. According to GlobeSt.com, a major resource for commercial real estate news and industry trends, the total dollar volume of commercial real estate properties sold here in the U.S. went down 93% between 2007 and 2009, but fortunately the market has now recovered since then.
But what can we expect to see in the availability of commercial real estate financing for the remainder of the year? The CRE Finance Council recently released a report on this subject, so let’s take a look at some of the highlights within it.
The CRE Finance Council (www.CREFC.org) predicts that good financing will continue to remain available throughout the remainder of the year. In addition, they predict that the total dollar amount of commercial mortgage-backed securities (CMBS) issued in 2015 will exceed the amount that was recently issued in 2014 ($91 billion), by approximately 25%. This in itself predicts what’s expected to be very robust commercial real estate financing becoming available throughout the remainder of the year. In addition, banks and life insurance companies are predicting that they’ll be making even more loans to commercial property owners during the year, too, and the loan underwriters are expected to get even more aggressive…allowing for even greater leverage and greater credit risks when they’re approving new financing.
While there has been much talk about the concern over interest rates rising in the near future, the general consensus of the report indicates that as long as any rise in interest rates is moderate, this shouldn’t cause any major concern.
Keeping all of this in mind, any seasoned commercial real estate investor knows that the market comes and goes in cycles, and it’s wise to look to the future. While we may be feeling great about the increased amount of financing that’s been coming available, one has to look to that moment in time when it could actually become a problem. As one investor said many years ago, “I should have known it was time to sell my real estate when the guy shining my shoes was giving me portfolio advice.” But in most markets we’re clearly not at that time now, and at the same time it’s still important to not go unconscious to this continually-improving market.
The good news, though, is that right now real estate financing is projected to get even better, and that’s putting smiles on the faces of many people within our industry.