While the residential market has suffered equally, commercial real estate typically falls the hardest and climbs the fastest. It has seen higher highs and lower lows than many other components of the market, but lenders are beginning to loosen their belts as things begin to improving.
That many commercial lenders feel cautiously encouraged could be an indicator of improvements to the economy as a whole. This year has brought the beginning of a recovery within the commercial real estate industry. There is more activity than there has been in some time, and more banks, insurance companies and other financing conduits are back at the table proactively looking to lend. Since mid- 2008, the industry has been fraught with frightened lenders and floundering borrowers. This year, there is more confidence and optimism on both sides.
Commercial real estate developers are a strong and resilient breed. The recession caused many previously solid, good developers to fail. However, the survivors are exceptionally creative and nimble, and have less competition. That said, the role of government in the banking world is serving as a buffer; banks continue to be closely monitored, which prevents the pendulum from swinging too rapidly.
Many banks have been absent from the lending arena for a protracted time, either because they chose to sit on the sidelines or because their own poor>> performance forced them to do so. Banks with money to lend have had less competition and a borrowing base that needed capital. Simple supply and demand drove cost, and while the overall interest rate indexes have been exceptionally low for years, banks could — and did — pay little heed to the indexes themselves. Interest rates are the way in which a bank is compensated for the risks it is taking. A riskier, more challenging market equals a higher price for the end user which, in this case, is the commercial real estate developer.
There have been bad cops and good cops in the lending arena. Several lenders were so panicked by the economic downturn that they looked for ways to decrease all real estate assets within their portfolios, whether they were performing or not. To encourage their borrowers to refinance elsewhere, bad cops used all efforts, including applying punitive interest rates and failing to extend maturity dates on otherwise performing loans. The good cops were the lenders that provided capital consistently, in many cases helping to resurrect a challenged asset by providing the dollars needed to refinance.
There are developers that have not only succeeded in recent years but thrived. They responded to challenges by adapting and using the market to their advantage. Low prices have provided the developer that has had capital with a unique opportunity to cheaply buy an asset, provide it with a heightened level of attention, affect its turnaround and vastly increase its end value.
There is nothing a banker likes better than an honest borrower. Surviving these past few years has taken talent, perseverance and luck, but it has also forced a level of brutal disclosure. Successful developers have proactively worked with their lenders, disclosing early and regularly fears they have, or problems they’re facing. A good lender will listen and help work creatively toward a solution. The result is mutual success and a healthier market.