Commercial loan credit crunch and illiquidity?
commercial loans started to slow down big time in 2022 with the rise of rates. Deals started to make less since to buy, finance and this lead to a major slowdown in the commercial real estate market. CMBS financing down 80%+ and commercial loan financing is down 70% from the peek when rates were low and the appetite for making commercial loans was very healthy. Bridge debt/construction debt got hit hard because rates went from the 3's to 9's quickly and deals started to make no sense. If you are building a project and, on your way, you are pushing forward and trying to get to the finish line. If you have a deal that had not been financed at this time, your loan might have got canceled from the bank or that 50 to 65% LTC and 9 to 10% rate made no sense to proceed with the project.
This was all prior to the SVB bank drama, commercial lending was already feeling the pain, and little did anyone know things were going to get worse. Now here comes the failure of SVB/Signature Bank. All the focus is on these small reginal banks who make up 70% of commercial lending and now these banks are under the microscope. So naturally, NOT all but many banks are in the process of looking at balance sheets, liquidity and making sure they are able to survive during these times. Slow down lending and getting more liquidity seems to be the focus for many of them.
The panic is there is $1.5 Trillion worth of commercial loans that need to be refinanced by the end of 2024. Is the debt market going to be there? Will the banks be able to step up? Will the government have to come in and save the day? How many of these big/small real estate deals that were purchased with bridge debt or creative financing be able to refinance? What is going to happen? This is the trillion-dollar question?
Not all banks have STOPPED lending, there will be small banks that are in a great position to lend and did not overload their balance sheet with loans when rates low. Investors will be forced to look at alternative financing, expensive bridge debt to get through this period, raising money from investors to save a deal, working out a loan modification from current lender.
WHO CAN HELP? Experienced commercial loan brokers will be a HUGE savior for many investors, they will have the resources, lenders, private money sources and help investors find a way to finance deals in todays market. If you are an investor and do not have an experienced commercial loan broker, find one fast because you will need them in today's market.
#1 Commercial Real Estate Investing Contributor
- Developer
Disagree with this Broker approach. Most people on BP are small investors versus the large REITS. Lot of the negative commercial loan info covers big deals and firms. A broker is great when shopping for rates. I wouldn’t go shopping.
Stay in the local market area. Develop a relationship with your banker or credit union. Make them a part of your team. Don’t treat them as a piece of meat. 1/2% point isn’t worth it.
Quote from @Henry Clark:
Disagree with this Broker approach. Most people on BP are small investors versus the large REITS. Lot of the negative commercial loan info covers big deals and firms. A broker is great when shopping for rates. I wouldn’t go shopping.
Stay in the local market area. Develop a relationship with your banker or credit union. Make them a part of your team. Don’t treat them as a piece of meat. 1/2% point isn’t worth it.
When your bank or CU is NOT lending then what do you do? When your banker leaves what do you do? How do you know who is competitive or not out there? This has nothing to do with rate, it has to do with the whole deal; rate, pre-pay, I/O,LTV, LTC, etc. So many banks/CU backing out on our clients that are small and big that have those relationships. Those clients call their trusted broker.
It just depends how high rates go and how long they stay there. Could be kind of ugly, could be very ugly.
I like to keep in mind that the sophisticated operators most likely bought rate caps and had extensions built into their original terms. Probably stands for less than 50% of the current loans, though. Multi-decade operators know how to protect themselves. They probably have the fund/client relationships to call capital as well.
I agree with you that there will be a big crunch and it could get ugly. I think it could play out several different ways which could leave several different parties "holding the bag" depending on when/how the music stops.
#1 Commercial Real Estate Investing Contributor
- Developer
They take our calls after hours and on weekends. And even this Easter weekend.
They give us 7 versus 5 year balloon terms when we refinance without asking.
They cut our interest rate by 1% to 1.5% if we move some cd or Money market funds to their bank as collateral.
When we are looking at a deal we call and tell them what it is for and how much. They call back in an hour and tell us yes we can do the deal and don’t have to put any downpayment or very little because they can readily cross collateralize across debt and assets. Come in next week and let’s sign the loan documents. They know our business model and the local climate.
They also tell us when they recommend we don’t do a deal.
They are part of our team and not a one and done.
One of them has been ranked in the top safest banks in the US forever.
Quote from @Henry Clark:
They take our calls after hours and on weekends. And even this Easter weekend.
They give us 7 versus 5 year balloon terms when we refinance without asking.
They cut our interest rate by 1% to 1.5% if we move some cd or Money market funds to their bank as collateral.
When we are looking at a deal we call and tell them what it is for and how much. They call back in an hour and tell us yes we can do the deal and don’t have to put any downpayment or very little because they can readily cross collateralize across debt and assets. Come in next week and let’s sign the loan documents. They know our business model and the local climate.
They also tell us when they recommend we don’t do a deal.
They are part of our team and not a one and done.
One of them has been ranked in the top safest banks in the US forever.
@Henry Clark sounds like you are a BIG client for them that has been around a while. For the new investor, this is NOT going to be the case. They would NOT get service like this and they most likely will NOT know where to go. Good for you but this is NOT the norm for everyone.
#1 Commercial Real Estate Investing Contributor
- Developer
Actually it is the norm for everyone. No matter how small or big. Develop the relationship and those benefits are there.
If you go through a broker and have loans at 5 different lenders. You can’t collateralize and you will be the first one that gets dropped.