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Lending standards hinder recovery

Lending standards hinder recovery

A recent survey real estate industry survey indicated that tight standards for small business lending apparently continues to be an obstacle to economic growth.Small Businesses require capital to purchase commercial RE, such as land, warehouse, suburban office and retail space to name a few. Although there seems to be slight improvement in access to business capital for larger commercial transactions, significant challenges remain for small business trying to find commercial financing.  Until standards ease up for small business lending, the overall economic recovery will continue to suffer as most jobs are created through smaller companies.


Source: Mercury, May 14 2012, by Rose Meily

Much like most residential real estate markets, the commercial real estate market is showing signs of recovery, but tight lending standards, particularly for small businesses, appear to be impeding growth, according to the National Association of Realtors’ annual Commercial Real Estate 2012 Lending Survey.

“This is very much a tale of two markets. There have been notable improvements in business capital for large commercial transactions valued at $2.5 million or higher, but there remain significant challenges for small business,” said Lawrence Yun, the national group’s chief economist.

“Our Realtor members typically are involved in helping commercial clients with purchases under $2 million, where a lack of business capital has caused two out of three respondents to report deals have fallen through. Given that most jobs are created through small business, the lack of capital is hurting small businesses and the overall economic recovery,” explained Yun.

According to Real Capital Analytics, more than 13,000 major properties valued at $2.5 million or higher traded hands in 2011. Sales volume increased 51 percent over 2010 to $205.8 billion, with the lion’s share of lending funds coming from big banks. Other business funding sources include insurance companies and institutional investors.

By contrast, the survey shows that small business transactions rely heavily on smaller regional and local banks, and small private investors, for lending capital. Respondents indicate nearly 30 percent of smaller commercial properties are purchased with cash, reflecting the tight credit environment, and some are seller financed.

“When credit is tight, cash is king,” Yun added.

The most common types of property transactions referenced in the survey were multifamily, land, warehouse, suburban office and retail strip centers. Other property types include industrial flex space, central business district office, freestanding retail and restaurants.

Longtime investors who never had a problem getting a loan in the past are now being declined. More than half of respondents say small business lending is just as stringent as a year ago, while 23 percent say it is more stringent; 20 percent say it is less stringent but not near historical averages. Members also complained about banks being over-regulated, and refinancing being denied due to stringent internal lender underwriting requirements or low appraisal valuations.

“If real estate is to fully recover, the lending industry needs to do its part by employing a more flexible approach to commercial financing and making loans more accessible to creditworthy borrowers and small businesses,” said Suzanne Yost, president of the Silicon Valley Association of Realtors.

The Commercial Real Estate 2012 Lending Survey is published by the National Association of Realtors Research Division for the commercial community. In April 2012, a random sample of 32,459 agents with an interest in commercial real estate was invited to complete an online survey. A total of 474 responses were received, for an overall response rate of 1.46 percent.