As published in Scotsman Guide's Commercial Edition, August 2008.
Despite all the bad news about the residential real estate market, the small-balance commercial lending sector for multifamily and income-producing properties remains strong. Significant opportunities still exist for investors and lenders alike.
No doubt the dramatic increase in foreclosures, coupled with an already poor economy, makes for emotional copy. Personal stories about bankruptcy and falling prices, leaving millions without any form of financial security, fill the airwaves and grace the pages of our newspapers. But among commercial lenders, there is a more optimistic tale.
In a recent Trendlines piece, Boxwood Means Inc.'s Randy Fuchs calls the small-balance market -- i.e., the market for loans of $5 million or less -- a "beacon of relative stability," based on 2007 data, with some softening.
Indeed, while commercial lending as a whole looks to have ebbed as a result of the macroeconomic factors weighing on the national economy, the multifamily market is still showing signs of strength. According to the Mortgage Bankers Association (MBA), first-quarter year-over-year figures show that pullback in loans for office properties is almost three times greater than it is for multifamily properties. Loans for hotel properties show a decline more than twice that of multifamily units, according to the MBA, while softening for retail-property loans is almost double that of multifamily.
The residential market, which serves as a warning about the dangers of easy capital and rampant speculation, may ultimately be an anomaly. As a result of that market, individuals and families find themselves dealing with foreclosure -- but they still need a place to live. Many will transition to rental units, which means more business for owners of multifamily buildings -- and more activity for commercial lenders.
Consider, too, that according to Boxwood Means, volume for small-balance commercial loans was near $140 billion in 2007, a large increase from four years ago. That trajectory, when viewed against the plight of the residential market and the economy as a whole, is cause for celebration.
The good news about commercial lending is not an isolated phenomenon, either. Consider commercial markets in cities in Florida and New York -- two states that have felt the impact of the sliding residential market.
In Tampa, Fla., the region's overall rental occupancy still exceeds 90 percent, according to a June article in the Tampa Bay Business Journal. Development of rental properties and redevelopment of existing properties are a high priority for the area's real estate developers, which saw the nation's largest home-value decrease this past September, according to the Case-Shiller price index. Before the nonprime crisis, developers snatched up multifamily-rental properties to push condominium inventory into the market. This removed many rental units from the market, creating a demand.
The news for commercial lenders also is inviting in the Schenectady, N.Y., area, where permits for multifamily properties were up 83.3 percent in 2007 compared to '06, according to an article in The Daily Gazette newspaper. Much of that development can be attributed to condominium projects in growing cities such as Albany, Cohoes and Saratoga Springs, N.Y., according to the article.
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For commercial brokers, opportunity abounds in the small-balance arena, especially for multifamily loans. This outlook contradicts the gloom and doom that is so commonplace among other sectors of the country.
The responsibility for members of our profession rests with further educating the public about this economic reality.
Leonard Manriquez is director and founder of ALB Commercial Capital in Altadena, Calif. A California-licensed real estate broker and certified-commercial-investment-member (CCIM) candidate, Manriquez has more than a decade of experience in the real estate industry. ALB Commercial Capital services the niche market of small-balance commercial loans.
Visit the company online at www.albcommercialcapital.com. Reach Manriquez at (800) 510-2214 or e-mail email@example.com.