2012 Commercial Real Estate Lending Survey

8/2/2019 2012 Commercial Real Estate Lending Survey

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NATIONAL ASSOCIATION OF REALTORS RESEARCH DIVISION


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NATIONAL ASSOCIATION of REALTORS | RESEARCH DIVISION | www.realtors.org/research

CONTENTS

Introduction

Survey Results: Market Environment

Survey Results: Lending Environment

Survey Results: Small Business Administration Loans

Survey Results: Legislative/Regulatory Issues..

Survey Results: Additional Comments.

2

3

4

7

11

12

15

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THE NATIONAL ASSOCIATION OF REALTORS, The Voice for Real Estate,is Americas

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the residential and commercial real estate industries.


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INTRODUCTION

Economic activity closed 2011 with a moderately positive performance.

Consumer spending kept a steady pace over the year. Corporate profits reache

record highs, as companies continued to trim expenses. Businesses increased

their spending by nearly 10 percent, and private payroll employment grew by

more than 2 million in 2011. Exports grew at a healthy pace, as did imports.

Even with no measurable change to the net position, the rise in international

trade naturally brought additional demand for commercial properties.

Regulatory and economic uncertainties, however, have been forcing companie

to hold on to high cash reserves. Employment remained hampered and

continued to require the addition of more than 4 million jobs just to recoverthe jobs lost during the harsh recession of 2008-09.

Consumers embraced the end of 2011 and start of 2012 with a cautious sense

of optimism. However, the direction of labor markets remained a concern,

casting a long shadow over the economic outlook.

Commercial real estate markets turned the corner in 2011. Demand stabilized

and is expected to grow in 2012 for all property types. Vacancy rates declined

and rents began rising. With growing households and a tight supply pipeline,the apartment sector is especially well positioned for 2012.

Investment activity recorded a positive 2011. Based on data from Real Capital

Analytics, more than 13,000 major properties traded hands during 2011,

totaling $205.8 billion in sales, representing a 51.0 percent increase from 201

With corporate profits at record highs, major economic centers like

Washington, D.C., New York, Boston and San Francisco were attractive

investment targets. In addition, declining cap rates for trophy properties lured

investors towards stable secondary markets, where returns proved more

appealing.

Against this backdrop, the National Association of REALTORS conducted a

national survey of commercial real estate members, focused on lending

conditions. The results are based on 474 survey respondents*.

EORGE RATIUanager, Quantitative &

mmercial Research

3


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SURVEY RESULTS: Market Environment

4

76%

21%

3%

Have you completed a sale transaction over

past 12 months?

Yes

No

N/A

0% 5% 10% 15% 20% 25%

Office: CBD

Office: Suburban

ustrial: Warehouse

Industrial: Flex

Multi-familyRetail: Strip Center

Retail: Mall

Land

Hotel

ther, please specify

Property type of most recent sales transaction

0% 20% 4

Auto Dealer

Car Wash

ChurchConvenience Store

Freestanding Retail

Mixed Use

Restaurant

Hospitality (owner)

Other, please specify

20%

80%

Sales to international clients/investors over

past 12 months

Yes

No


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5

0% 5% 10% 15% 20% 25% 30

Financing: 90% LTV

Financing: 85% LTV

Financing: 80% LTV

Financing: 75% LTV

Financing: 70% LTVFinancing: 65% LTV

Financing: 60% LTV

Financing: 55% LTV

Financing: 50% LTV

100% Cash

How were most of your sale transactions in the

past 12 months completed?

sh or Seller financing is the only way to go

th some of the older properties that I

present.

ost deals are completed with cash.

e're only selling properties at bargainces and to buyers who have money at this

me.

0% 10% 20% 30%

< $250,000

$250,000 - $500,000

$500,000 - $1,000,000

1,000,000 - $2,000,000

2,000,000 - $5,000,000

,000,000 - $10,000,000

> $10,000,000

Value of most recent sales transactionI have investors that want to buy but Banks are

holding up the process when it comes to

Foreclosures.

The area where I reside has been very depresse

and the local and national banks will not even

look at any new deals and are failing to renew

many of the old loans. We have had many ban

failures in South Georgia and will probably seemore this year. The only deals we have closed

have been all cash or owner financing.


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6

0% 5% 10% 15% 20% 25% 30

National banks (Big four)

Regional banks

Local banks

Credit unions

Life insurance companies

REITs

Private investors

Public companies

all Business Administration


Current sources of financing for commercial deals

nks can borrow money virtually for free and

nvest in T-Bills or other instruments and earn the

read without the risk of lending.

ncern is for small business and new business

owth; no one wants to take risk anymore so

siness owners need access to capital. That is very

ficult for the small business owner to be able to

cess capital funds. The capital funds only want to

big deals.

s virtually impossible to start a new project.oney is so tight that even the best projects are

ving a difficult time finding funds to start the

oject.

nding for B and C retail is practically non-existent.

vate lending needs to be promoted in order to

se the lending market.

National banks, who received large TARP funds

simply will not lend in secondary smaller markets.

The primary lenders outside of the major metro

areas are local banks. Due to their size they are

limited in transaction size making financing difficul

for medium to large projects.

Rates are excellent, which leads to easy to cover DC

requirements.

The rates that are available on the market today a

at historical low rates.

The system is clogged with property that needs to b

sold or refinanced and until this happens, we will n

have real recovery. Without obtainable and

workable financing we are kidding ourselves and

this shows since the recovery supposedly started

over a year ago.


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SURVEY RESULTS: Lending Environment

7

67%

33%

Have you had a sales transaction fail during

the past 12 months due to lack of financing?

YesNo

43%

57%

Have you had a transaction fail during the

past 12 months due to appraisals?

Yes

No

I have been a Realtor/investor for 40+ years and

have NEVER had a problem getting a loan to

purchase investment real estate. Now it is a

problem, even though I have no blemishes on my

record. The banks say the regulators say I have too

much real estate, therefore I'm a risk.

It is extremely hard for people to borrow money.

Credit ratings and requirements are too stringent.They must be lowered, in order to for people to

begin investing and constructing real estate. Many

people are waiting for banks to loosen lending

requirements. New residential homes, multi-family

housing projects, and commercial construction for

small businesses would increase immediately.

Lenders are now asking for 25-35% down, and also

asking for 25 -35% IN WORKING CAPITAL.

Reduce equity required by small businesses to 15%

from current 30%.

The refinancing of CRE has to occur. At which level

of regulatory oversight is the question. Banks and

life Companies are the only viable source of debt.

The CMBS market is inconsistent and unpredictable

Not enough volume to support the maturing loans

that are coming to market. We need a stable CMBflow of business to deal with the CRE loans but who

will buy the bonds?

Appraisals need to be based on current NOI (Incom

basis) and not on current sales of same asset types

Unfortunately, distressed sales are used more by

commercial appraisers and this reduces values of

Good Income assets, in NON distressed sales.


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8

0% 10% 20% 30% 40% 50% 60

More stringent than a year ago

Just as stringent as a year ago

s stringent than a year ago, but not near historical

averages

Not at all stringent and almost back to historical

averages

Do not know

Are loan underwriters / lending committees making financing decisions on commercial

properties with standards still as stringent as one year ago?

nks being over regulated is making our businessuch more difficult.

nks need to get lending again!!!

nks need to loosen up their LTV ratios, to help new

siness to get financing.

uity requirements for redevelopment of properties

e too stringent and onerous.

ss regulations but with proper guidelines. We

nt need more loans. Taxes need to be reduced to

mulate equity in the economy which promotes

owth. Restricting laws deter that.

move all bank regulatory rules and let the market

at on its own merits.

Remove regulations that are administered by publiagencies and provide added incentives to the priva

sector. Let the market establish supply/demand, no

the regulatory agencies. Eliminate uncertainty

regarding taxation issues, accounting controls, etc.

so that the private sector can plan investments

farther than 3-months to a year in advance. Get th

national debt under control by eliminating much of

the public sector and regulatory agencies.

The biggest problem is the Federal regulators. They

will not allow banks to take any risk at all. Until the

loosen up on the banks nothing will happen.

THE main issue is over regulation, especially on

healthy community banks.

Avg. Debt Service

Coverage Ratio = 1.3


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9

50%50%

Have your clients failed to complete a re-

financing transaction during the past 12

months?

Yes

No

52%48%

With properties with re-financing issues, if

owners provided an existing/new property

lease with NOI at pre-2006 levels , did the

property still fail to secure re-financing?

Yes

No

44%

56%

If you answered Yes, the reason was

due to:

Appraisal /

Valuation

Internal

underwritin

requiremen

of lender

0% 5% 10% 15% 20% 25% 30

Increased 1% - 4%

Increased 5% - 9%

Increased 10% - 15%

No Change

Decreased 10% - 19%Decreased 20% - 24%

Decreased 25% - 29%

Decreased 30% - 34%

Decreased 35% - 39%

Decreased 40% - 49%

Decreased 50% - 75%

How did net operating income ($/SF) of sold/leased

properties change from the 2007.Q4 to 2011.Q4?


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10

0% 5% 10% 15% 20% 25% 30

Reduced net operating income, property values, and

equity

A slow-down in the pooling and packaging of CMBS by

financial institutions

Regulatory uncertainty for financial institutions

New and proposed US legislative and regulatoryinitiatives

Inability of banks to dispose of distressed assets

European debt crisis


The most relevant cause for lack of sufficient bank capital available for commercial lending

of the items in question 6 threaten the ability of

e economy to recover. In totality, the combined

fects of these regulations create consequences or

products that are unnecessarily harmful to an

propriate recovery. Additionally, the impact of

gulatory uncertainty absolutely discourages all

rties from moving forward. Regulatory

certainty, combined with recent regulations and

oposed regulations, are creating disincentives to

vest and in some cases a stranglehold on the verytities who can start to invest and make loans

ain.

edit Markets are complex. Best legislation is to

el the playing field and not favor one group of

ders/investors over the other. Mostly, it is the

eling of confidence in the future for lenders and

rrowers and there is a historic relationship

between stability of the rules and investment in

commercial real estate (or any other real estate for

that matter). If those in charge are clueless or pron

to experiment with systems history tells us always

fail, best go fishing for a while.

The worst possible thing that could be done would

be to incentivize investment by accelerating

depreciation. We tried that decades ago, and the

results were disastrous. Depreciation has a purposeto allow taxpayers to recognize the monetary losse

as they occur. When the purpose of depreciation is

changed, such as to encourage investment,

taxpayers make investments that are in their best

interest; however, these tax-shelter-induced

investments are not, collectively, in the best interes

of society.


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SURVEY RESULTS: Small Business Administration Loans

11

36%

46%

18%

Have your clients used/plan to use the Small

Business Administration (SBA) commercial

refinance program?

Yes

No

N/A

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50

Did not know the program existed

rdensome application and reporting requirements

Due to past SBA experiences


If you answered "No" to the previous question, why not?

[] Activity has increased

dramatically in the last 6 months,

mostly apartments and SBA, both

7A and 504 programs. Small Banksare increasing their activity in the

Bay Area.


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SURVEY RESULTS: Legislative/Regulatory Issues

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0% 20% 40% 60% 80

Decrease the flow of capital into U.S. real estate

e no effect on the flow of capital into U.S. real estate,ut change the way in which transactions or loans are

structured

ve no effect on the flow of capital into U.S. real estate

Increase the flow of capital into U.S. real estate

Impacts of new/proposed U.S. legislative and regulatory initiatives

ed to get the awareness out about the key policy

ues that impact the Commercial marketplace.

ed to address the need and approach to re-

iting a number of the commercial loans versus

t moving the obligation down the road through

tensions. We need to better understand what is

e current obligation and how much of that is

derwater and requires a fix.

nks do not want to lend. Banks are overly

rutinized by the Feds. Banks do not need to be

iled out with our money. SBA is the only game in

wn and should loosen up the current lending

actice and make it easier to obtain loans for small

siness. To the contrary, the current environment is

ainst small business, hence the lack of good jobs

d high unemployment.

Senator Dick Durbin needs to be aware of how the

Dodd-Frank Bill has made it very difficult for lendin

institutions to loan to willing buyers. The banks

have lots of cash but are not able to lend due to

borrowers needing to just through too many hoops

UntilCapitol Hills policy makers stop to consider

what their reforms legislation does to the small

business owner, the capital markets will remain

frozen as this type of legislation promotes

uncertainties in the way of tax allocation and futur

profits on and of the initial investment.

Any government action will NOT improve condition

Let the markets take care of themselves.


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13

The most important new/proposed regulations for

small business & commercial real estate lending

consistent regulatory guidance (Commercial loan workouts/extensions) 59%

sk retention (Dodd-Frank Act: banks that package commercial loans are required

keep 5% of the credit risk on their balance sheets)46%

ase accounting (FASB proposed new accounting rule that capitalizes real estate

ases onto company balance sheets) 41%

edit rating agency reform (Dodd Frank Act reforms would tighten regulations

verning the securitization process and strengthen investor protections)30%

asel III (Basel Committee on Banking Supervision announced new, higher capital

andards for banks to boost common equity requirements to 7% by 2019)27%

ark-to-market accounting (Proposal by the FASB to extend fair value requirements

at currently cover complex securities to loans on banks books)26%

olcker rule (Nonbank financial companies supervised by the Federal Reserve that

gage in proprietary tradingor acquire ownership in or sponsor a hedge fund or

ivate equity fundwould be subject to additional capital requirements and

uantitative limits as determined by the Fed and other banking agencies)

22%

egistration of investment advisors (SEC proposal to implement provisions in Dodd-

ank Act that would eliminate certain exemptions from the law while requiring

visors to real estate private equity funds and other private funds to register with

e SEC)

17%

TC derivatives reform (Establish federal regulation of over-the-counter (OTC)

erivatives bringing this unregulated market under federal regulation for the first

me)14%


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14

0% 5% 10% 15% 20% 25% 30

Credit union lending (Legislation introduced to raise

the member business lending cap from 12.25% to

27.5% of total assets for well-capitalized credit

unions)

Covered bonds (Legislation introduced to create a

US covered bond market)

Accelerated depreciation (Legislation introduced toincentivize equity investment in distressed CRE

properties by granting investors a one-time 50%

bonus depreciation)

Improved bank liquidity (e.g. Allow banks to

mortize losses attributable to CRE lending over a 7-

10 year period)

Extended/improved the SBAs new commercialrefinance program (Program provides SBA loan for

up to 40% appraised property value with no less

than 10% of remaining amount to be contributed

No policy action (Allow full private market

correction)

The most important proposed policy priority needed to improve commercial lending

conditions


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ow banks to foreclose on commercial property atrrent market value and write off losses.

nks which have increased credit score requirements

e going to have to accept lower scores in view of the

onomy over the past four years. Some good people

ve taken big hits, including many Realtors/investors.

d funds rate at 0% has made it easy for banks to invest,

her than lend, to make their margins. A government

ich is tightening policy across the board needs to

alize that the economy will be in restricted growth

ode due fully to the new policies. Especially when that

vernment ENCOURAGED the very policies it now wants

change.

n't understand why some banks only loan 70% on the

d and don't include the value of the buildings contents

en it's a commercial business such as a

r/restaurant.

t bankers to work with people instead of killing them

d making problems worse and causing significantgative ripple effect. They could work with people, loose

s themselves, save the debtors and most of their

ditors too if the banks would use a little compassion

d common sense. Only asking them to lighten up to

ere the bank itself stands to still make a profit by not

ing their debtors.

elieve the banks have to start lending again with fewer

trictions, and less government regulations and the

praisers be more realistic and more educated aboute CRE.

ersonally think that continuing to "milk" bad

mmercial loans and offering extensions and or

SURVEY RESULTS: Additional Comments

15

workouts is the wrong thing to do...just to keep it out ofthe banks "bad loan portfolio" and out of the public eye

Such deals were not offered to many who lost their

homes and these commercial properties need to be

placed on the market and purchased by credit worthy

buyers!

My regional commercial bank is excessive and punitive

its requirement for its additional equity requirements fo

construction loans.

Revaluation of existing loans even when loans are not in

default requiring either additional collateral or greater

equity drains needed capital from businesses and

investors while not improving anything for the lender b

alleviation of assumed greater risk in the event of

lowered appraisals comforted by equity or collateral.

Select banks are lending on a very, very conservative

basis. Putting even the most qualified small business

owner's through hell to obtain loan commitments, ergo

for real estate or start-up loans, and hoping for"deflated" appraisals (relative to contract terms)to

require additional equity from sponsors.

The Banks are asking for fully executed Leases and the

financials of those Lessees prior to a loan for

construction. This used to be done with just LOIs. This

level of documentation from Lessees, prior to actual

construction is prohibitive. Also the CAP rates required

have been raised to levels that are not reachable in a

down market.

There is still a vast problem with all Lenders, especially

the "Big Four". Qualified Purchasers are constantly and

indirectly penalized. Un-Qualified persons are given an

Open Door for Loans.

ote: In April 2012, NAR invited a random sample of 32,459 REALTORS with an interest in commercial real estate to fill an on-line survey. A

al of 474 responses were received from 47 states, for an overall response rate of 1.46 percent.


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NATIONAL ASSOCIATION OF REALTORS

RESEARCH DIVISION

The Research Division of the NATIONAL ASSOCIATION of REALTORS

provides research products focused on commercial real estate

markets:

Commercial Real Estate Outlook, a quarterly report

forecasting commercial market fundamentals.

Commercial Real Estate Quarterly Market Survey, a

quarterly assessment of commercial leasing and sales

trends in REALTOR markets.

Commercial Member Profile, an annual survey detailing thbusiness and demographic characteristics of commercial

members.

Additionally, NAR Research examines how changes in the economy

affect the commercial real estate business, and evaluates regulatory

and legislative policy proposals for their impact on REALTORS, their

clients and Americas property owners.

If you have questions or comments regarding this report or any othercommercial real estate research, contact George Ratiu, Manager,

Quantitative & Commercial Research, at [email protected].

To find out about other products from NARs Research Division, visit

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Documents

2012 Commercial Real Estate Lending Survey