Take a Banker to Lunch Today!
As the current business cycle is “aging out” which most economic cycles do, the state of banking and finance are a major concern. There is no doubt the Federal Reserve and their related Federal Banking Agencies are beginning to become nervous about the current state of Commercial Real Estate and the lenders within this sector that are getting sloppy with their underwriting criteria. There have been numerous recent articles reporting on this topic, which are cited below this post. We in the Commercial Real Estate Sector need to start paying attention to the red flags and the market forces capable of pulling the economy in all different directions. However, the elephant in the room is the looming presidential election, which is creating higher levels of uncertainty. Investors are making their bets, but what sectors they are optimistic about is merely speculation
Undeniably, there is a high degree of uncertainty surrounding the Commercial Real Estate market and the economy as a whole. Investors are speculating about the best investment vehicles to pursue in order to maintain a safe yet profitable asset
The overriding factor of market fundamentals is FINANCING. Few small companies have an equity component to survive on their cash in the bank or their monthly sales. This is the main reason banking and finance is so important to not only the small business owner, but even the large Multi-national companies. The difference is small businesses rely more on their banks while large companies have more financial resources at their disposal.
Take the small business owner for example. The business owner may need a loan for expansion to increase their geographic presence, purchase a brick and mortar commercial real estate location, need money for interior build-out or fit-up, etc., they will usually contact the bank who has been loyal to their business venture.
I always advise my clients, to first go talk to the bank with whom they have an existing relationship. The bank knows the intricacies of the businesses’ cash flow and projections, business model, gross receipts, and overall capital requirements.
The problem that is starting to happen both on a large scale and small one are the banks are being hindered by government regulation and very tight oversight. Lending is not a judgment anymore, because the current regulations create a risk adverse environment. Also, it is possible that local banks otherwise known as small local community banks can run out of money to lend. These banks do not sell their loans on Wall Street. They keep them on their books as well as service them.
In such a situation, these banks begin to change their lending criteria, such as change the maximum dollar amount of loans, adjust the parameters such as loan-to-value (LTV) ratios, in terms of real estate acquisitions, alter the debt-to-income ratio requirements of a business owner, and restructure their portfolio to the types of assets or commercial properties they will finance, basically changing their “Sweet Spot”. What Bank you started with may not be the same Bank you have today.
You can read some of the recent business articles that have been published concerning the Feds growing concern on Commercial Real Estate Lending. The most recent one is titled is “Bubble Trouble: 5 Ways Banks and Borrowers Can Avoid Real Estate Risk” Forbes 7/21/2016 http://tinyurl.com/jzva2y2
The real issue is every time in the last 42 years when the Federal Reserve or another Regulatory Banking Agency starts to vocalize their concerns about Commercial Real Estate Lending, it is shortly thereafter that Ice Water is thrown onto the lenders desire and ability to lend and they cut back or practically cease lending. With the majority of CRE transactions including an equity and debt contribution, the tightening of the capital markets so begins the next Commercial Real Estate Meltdown and most likely recession!
At Present, The Federal Reserve is scrutinizing the loosening of underwriting standards for commercial real estate loans. Why are banks so eager to lend? Because that is the only way they can make money. The irony of the Fed’s actions is the fact that all the $2 Trillion Plus of Quantitative Easing (QE) over the last 5 years was meant to stimulate the banks to lend rather than give it back to the Feds at super low interest rates. Consequently, this catalyzed the market for Commercial Real Estate Investments and lending. It is due to investors “Chasing Yield”. That is a term whereby interest rates on the safest investments such as Government Bonds (Debt) are so low, that investors cannot afford to put money into assets or funds that have minimal returns. That goes for Banks, Insurance companies, Pension Funds, and all other investment institutions, each who have their own portfolio to mitigate risk and return. They promise their stock holders, policy holders, and investors a certain return on their money. You can’t get those returns when investing in Safety such as United States Treasury Notes and Bills. So what these investors and institutions see is that Commercial Real Estate will provide much higher returns with little risk in their collective minds. That is also why the very large Institutional Investors will buy what is known as “Trophy Properties” they are the high profile, beautiful or Iconic buildings mainly located within Urban Areas where the buildings have high net worth and credit rated tenants signed to long term leases. Great!
This does not make up the vast majority of investment sales, although these purchases do make industry headlines.
So why is the title of this article “Take a Banker to Lunch Today!”?
It is precisely because you, a Commercial Real Estate Broker or business owner, need to know which banks are still lending, how they are lending, and what types of properties they will underwrite. However, the intricacies of lending do not stop at the “publicized” lending criteria. For example, there are certain conditions in which the bank will lend to the business owner, such as moving their account to their bank, demand corresponding bank balances, and limit the maximum lending amount until certain milestones are achieved etc. When you have a client looking to buy commercial real estate or open a small business, finding the right banker can make all the difference in executing and completing the deal. Nobody wants to be a deal killer and not having enough lending resources is not an acceptable answer!
Soon before the 2008 crash, I had a client looking to buy a retail business location and had made applications to multiple banks such as large Nationals, Local but out of State, and Banks that did not do much lending in the commercial real estate sector. The banks she applied to gave her “the run around” for months, while continuing to take her money for the loan application and administrative fees. After learning about her situation, I finally stepped in and recommended a local banker who knew how commercial real estate deals work. This specific situation was unique in that the business owner purchased the property in their name and leased the business to their retail business entity. The end result was success and continued success even today 10 years later.
As Commercial Real Estate Brokers and Business Owners Big and Small, I have a motto which is basically this…
“You cannot know enough bankers or lenders”.
List of recent Bank articles:
One Big Small Bank Reason to Worry About U.S. Commercial Real Estate
http://tinyurl.com/z55f8lb (NREIONLINE.com) 7/11/2016
Fed Warns of Vulnerabilities Building in Commercial Real Estate (6/21/2016)… http://nreionline.com/bloomberg
Be Afraid: $56B in Maturing
Retail Loans Could Face
Refinancing Troubles (6/8/2016)