Top 3 Commercial Real Estate Loan Options to Consider in 2017
Dec 29, 2016
1. Continuation of Borrowing from Conventional Lenders
Regardless of all the talk of market risk and uncertainty, there is still money to be made in financing commercial mortgages by conventional lenders and therefore they will continue to lend to credit-worthy borrowers and on the “better” commercial properties. Though it would be good to consider that the attitude of conventional lenders is increasingly switching from the positive thought process of, “here are the benefits of a property and its borrower(s)” to the more cautious thought process of, “here are the reasons why this loan request is too risky”. It is a subtle difference. However, it is one that will undoubtedly cause more loan requests to be rejected. With increased lending regulations and concern for another real estate bubble bursting, commercial borrowers that fall outside what is considered the top tier may find it difficult to obtain a commercial loan from this source.
2. Alternative Financing – Commercial Hard Money Lenders
For those borrowers who may not have perfect credit, who do not have the financials to satisfy conventional underwriters, or may have a less than “Class A” property to offer as collateral, alternative financing options offered by commercial hard money lenders is certainly a viable and growing option to consider. Commercial bridge lenders typically accept less than perfect credit and offer's more flexible underwriting to accommodate loan requests conventional lenders turn down.
As conventional lenders tighten their credit output and with more commercial loans coming due in 2017, the role of commercial hard money lenders of providing needed financing will continue to grow.
3. Crowdfunding Commercial Real Estate
The commercial real estate financing option of crowdfunding, allows a borrower to capitalize their real estate project through “equity financing”. By raising the needed funds from qualified investors through public offerings, a real estate owner can gain the commercial financing they need by sharing in the future profits of the real estate crowdfunding. A growing source of commercial real estate financing is offered in the form of equity financing while saving on the cost of borrowing. Comparatively, conventional lenders and private money sources offer “debt financing”. Upon full repayment, a borrower is free of further obligations to the lender. However, interest payments, fees, and other loan costs can make debt financing prohibitive, while decreasing the return-on-investment and increase the risk of loan default.
The Commercial Lending Environment in 2017
Commercial loan defaults are expected to climb in 2017 as more and more 10 year fixed commercial loans originated in 2007 with balloon payments are slated to mature.
With unemployment rates continuing a decline, asset prices surpassing historical levels, and inflationary numbers showing signs of increase, the Federal Reserve board will likely push to normalize interest rates with further systemic rate increases.
The total Commercial Mortgage Backed Securities (CMBS) loan issuance for 2016 is projected to be $68.3 billion which represents a 29.1% decline from 2015’s volume of $95.1 billion, according to Commercial Real Estate Direct. 2017 is presumed to continue this year-over-year decline.