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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   September 2013

Trace the Trends

Follow the money to capitalize on the recovery in commercial mortgages

Trace the Trends

As the economic recovery takes hold, many commercial mortgage brokers are seeing their pipelines filling up, and they’re rightfully optimistic about the future. After five long years of pain and struggling to survive, a turnaround in the market is finally in sight.

For commercial mortgage brokers who have been tough, smart and resourceful enough to survive the Great Recession, the coming 12 months to 18 months can provide top career opportunities as the overall commercial mortgage market and the U.S. Small Business Administration (SBA) lending program are poised for growth.

Right now, there are several factors and trends that are expected to play in favor of commercial mortgage businesses. Although some are a continuation of the market’s current trends, they reinforce potential borrowers’ positive sentiment regarding the direction of the market. Keep the following points in mind.

  1. Secondary markets: The secondary markets where commercial mortgages and SBA loans are sold are expected to remain strong. This past year, commercial mortgage-backed securities (CMBS) issuance was $48 billion. By some estimates, CMBS issuance is expected to continue on its upward trend and eventually reach its prerecession levels, when it peaked at $230 billion in 2007. The increased activity in the secondary market means more liquidity for banks and for the overall market, which translates into easier funding for borrowers and more closings for commercial mortgage brokers. When banks can free up loans on their balance sheets, they can re-lend capital that previously was “locked up.” Expect credit parameters to continue to be more flexible and loan terms to get better for borrowers. Eventually, the credit situation will be reversed, and lenders will compete to win deals.
  2. Small-business funding: Small businesses are expected to become more bankable from a traditional underwriting perspective. They have paid down debt and now have access to more liquidity to use as equity injection on purchases. Many small businesses have been performing well compared to recent years, making them look more attractive to lenders. Because many small-business operators have spent the past five years cutting costs, their profit levels today are higher.
  3. Higher loan-to-value ratios: Financing of as much as 90 percent is available through SBA loan programs. Borrowers who have well-performing, profitable businesses won’t have to tie up as much capital in their commercial real estate. They can take control of their properties and put themselves in a position to build equity and long-term wealth. If you chose to work with the right lenders, SBA loans typically don’t take longer than conventional loans to process, and they are fully amortizing (for as long as 25 years). They have no balloons or early-call features.
  4. Interest rates: Despite recent increases, interest rates likely will stay at relatively low levels. Small-business owners will be motivated to act before rates return to more normal, higher levels.
  5. Economic recovery: As the overall economy continues to recover, expect more bold moves from small-business owners who may become more open to invest in hard assets such as commercial real estate. This will be driven by their desire to gain additional control over their businesses.
  6. Property values: Small-business owners recognize and feel the pressure of appreciating commercial real estate prices. They won’t want to miss out on current values, so expect some of those who have been on the fence to make a move soon.
  7. Inflation: It’s just a matter of time before inflation returns. With that, your clients will want to have as much control as possible over their real estate expenses.

With these points in mind, commercial mortgage brokers should learn how to hone their strategies to be able to capitalize on the coming period’s opportunities — like the potential increase in purchase-mortgage volume. Brokers also should target and focus on the most financeable loan types. To do so, think of where the money is at. The answer is simple: owner-occupied general-purpose real estate. This can be any property type (office, retail or industrial) with a loan amount between $500,000 and $3 million.

It also helps to know which asset classes you’d better avoid. These include commercial investment property loans that lack national tenants; have short-term leases; have loan amounts that are less than $3 million; and are located in towns with populations of less than 50,000. These properties are still undesirable by commercial real estate lenders, particularly as many may have been dormant for years.

It’s unfortunate for these properties’ owners, but the market reality is what dictates lending options, and you should put your time and effort into deals that are likely to close. Still, if you insist on pursuing these loans, you may find one or two local banks that are interested in the stronger cases of these properties, but you won’t have a robust pool of lenders to work with.

With the right focus and a full understanding of potential market trends in the coming months, commercial mortgage brokers should be able to earn their piece of the recovery and take their careers to the next level in the near future.


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