VOL. 127 | NO. 99 | Monday, May 21, 2012
SPECIAL EMPHASIS: Financial Services
CRE Lending Sees Slight Improvement
By MICHAEL WADDELL
The commercial lending landscape in the Memphis area continues to grind its way through an extended period of gradual improvement that began roughly two years ago after a dismal 2009.
“Loans for A- and B-class commercial properties are back. The owners have plenty of choices now,” said Frank Stallworth, president of Magna Bank’s commercial and multifamily division. “There’s no question that values have declined compared to 2007, but for the most part those values have stabilized. 2011 was better than 2010, 2012 is shaping up better than last year, and we expect 2013 to better than 2012 as it relates to occupancies as well as stabilizing and possibly increasing rents in the various sectors of commercial real estate.”
Stallworth attributed improving conditions to three factors: 1) unemployment numbers have improved, causing occupancy rates to rise and rents to stabilize in the office and retail sectors; 2) there has been very little lending for new construction in 2009, 2010 and 2011; and 3) interest rates are at historic lows, leading many owners to refinance their properties.
Andrew Gibbs, senior vice president at Mercer Capital, said he is also seeing improvement in 2012.
“There seems to be more interest and activity now, but it’s not back to the levels of 2005 and 2006 yet,” he said. “Many of our clients saw their loan portfolios really shrink last year from year-end 2010 to year-end 2011 primarily due to very soft demand at the start of last year. Inquiries picked up starting at the end of the year, and now they are looking to build their portfolios again.”
Rick Hall, executive vice president handling commercial lending at Renasant Bank, said his bank has added three new staff members in the past six months to accommodate the increased activity.
“Our loan production in the past six months is as high as it’s been in the past three years, and our pipeline is looking strong,” he said. “We haven’t had a pipeline like this for several years.”
Hall said he is seeing growth in acquisitions, business expansion, refinancing and a small amount of new construction. He also feels banks are finally starting to loosen up the purse strings.
“Banks have had a lot of liquidity and loans paying off, and now they are looking to put money out there, so they are being more aggressive on the rate side,” Hall said.
Stallworth pointed out that 50 percent of Magna Bank’s commercial lending so far this year has been with refinancing deals, about 30 percent has been with acquisitions and 20 percent has been new construction projects primarily in the multifamily and hotel segments, with no new loans so far this year for construction of office or retail space.
Some larger regional banks, according to Gibbs, are offering refinancing terms like 10-year fixed rates near 4 percent that are difficult for many community banks to match.
“Because rates are so low, borrowers want to lock in their cost funds for as long as they can,” Hall said. “Big banks have indicated some willingness to enter into loans like that, whereas the smaller community banks are fearful of the risk.”
Gibbs sees more activity with owner-occupied commercial deals versus income-producing properties like office buildings or hotels. He feels the strongest sector for new commercial construction has been in health care facilities. Two new construction projects in the planning stages include a Baptist Memorial Health Care’s 240,000-square-foot cancer center in Germantown and its 217,000-square-foot replacement hospital in Oxford, Miss.
Potential new-build hotel projects continue to require the most money down, with 30 percent to 40 percent necessary on the front end, while other types of commercial developments (office, retail, health care) might only require 15 percent to 20 percent depending on a number of factors like pre-leasing for new office space and anchor tenants for new retail.
Numbers from real estate information company Chandler Reports, www.chandlerreports.com, show that overall sales activity was up in the first quarter of 2012.
In the first quarter of this year, there were 185 commercial sales averaging $1 million and totaling $188.3 million in Shelby County versus 166 deals averaging $811,665 and totaling $134.7 million during the first quarter of 2011.
The number of commercial real estate sales rose 11 percent during 2011, with 725 total transactions compared to 656 in 2010.