Yes, you read correctly. This year, our industry projects a drop in loan production from previous years and the late 1990's when we saw funding closer to an excess of $300 billion. But even with this projected drop-off, the amount indicated is certainly nothing to sneeze at. Our question to you is: "Are you ready for the demand, and will you be one of the brokers who will help in achieving that goal?"
Over the past six or more years, we have seen a resurgence of commercial loan activity, slower on some local levels, but certainly expanding to new heights in both the national and international scene. This is due to the heavy use of public capital; capital that will continue to stay with us for long periods of time to come. Public capital comes in the form of Real Estate Investment Trusts (REIT) and Commercial Mortgage-Backed Securities, (CMBS). Its presence is here to stay, and its modus operandi will have a definite effect on how we do business both today and in the future.
Over the past four or five years, I have continued to stress the need for Mortgage Brokers around the country, regardless of how long they have been in the business, to learn all they can about the CMBS marketplace. It currently is, and has been, the leading giant in funding commercial mortgage loans around the country, and it will continue to be very prominent in the coming years. Not only must brokers educate themselves on the way they are doing business these days, but they must educate the client as well! The funds are available; can your deal "make the grade?" The way we thought 10 years ago is now gone. Lenders have learned over the years from both their successes and failures. And now they have another "watchdog" working with them to insure added credibility on all funded loans. We refer to the rating agencies. In the past five years, Wall Street has learned our business, and right or wrong, they'll continue to be a partner with our lenders in making deals happen.
The type of transaction and its characteristics will have a definite bearing on the final amount committed, the margin (profit) over the corresponding index used by the lender, and specific terms required to close and fund. Each commercial property type has its own set of underwriting guidelines. You, as the broker, must be knowledgeable in those requirements, and use them in your preliminary analysis. Be honest with your client, explain to them why certain items are included in the expense column, and the purpose of added line items such as Tenant Improvements and Leasing Commissions (TILC). We may not like the added expenses (they reduce our loan amount), but we have to live with them. In the long run, it actually ends up being a "positive" for the client. Initially, they won't see it your way, but to be honest, they are quite aware of why it's being done. For those brokers who have faced this so-called obstacle, it's an uphill battle with the client or their agent. And, as we all know, there are brokers who will inform their clients that it's unnecessary, that they can get their lenders to "waive" that requirement, and tell their clients whatever they (the client) wants to hear. Honesty is the best policy, but remember, your reputation will follow you.
This year, our marketplace will continue to be the multi-family projects, with vacancies remaining low, and with high lender desire. Retail and industrial funding will continue to move at a reasonable pace. However, the strength of the leases will ensure approvals and funding. Although we will all agree that there has been an over-building in the hospitality industry, certain lenders will still consider your application if--and I say if--the project is in the luxury or high profile chain. What has helped this industry has been the clients' ability to keep their ADR's up and expenses at a minimum. Demand for office buildings has decreased, and our field experts indicate that in most areas, we will see over-building and higher vacancies in suburban locations.
For those brokers who are still new to this phase of our industry, keep your eyes and ears open to the small loan requests that enter your offices. They may be as low as $250,000, but many of the conduit lenders have specific programs for these types of loans, and are willing to work with you to make it happen. Just remember, the size of the loan may be low and it may take somewhat less work on your part than a larger loan request, but the bottom line is that the numbers must still make sense, and the majority of exhibits are very similar in nature, whether a request for $250,000 or $2 million.
Everyday we hear that rates will continue to rise...and they most likely will. There is an ever-increasing pressure on the Fed to insure that the big "I" word does not effect our current way of life. With the abundance of mortgage funds available in the marketplace today, lenders will be watchful to keep the rate scenario on a positive level, somewhat similar to 1999, and if necessary, keep their margins disciplined. This will make deals happen, and place a positive effect in the mind of the consumer that it is still good to do business these days.
Every year for the past three years, I have had suspicions that the marketplace was going to slow down, and so far, I have been happily wrong. At the end of the past three years, I have sat back and was astonished by what really happened in the marketplace. This year is about the same, except that I do feel that business will be out there, moving slowly, and with more lenders seeking fewer deals. For all of our broker readership--be positive, be persistent, and lastly, remain "professional."
Anthony M. Gramza, President of AMG Commercial Group and NAMBEF Region I Director, may be reached at (716) 264-9540 or E-mail [email protected]