Commercial Mortgages Decline 31% in May

By Eric Smith

CHANGING MARKET: Financing for commercial projects like this one – the renovation of the old Oak Hall building at 555 S. Perkins Road Extended – have been harder to obtain because of the subprime fiasco that began last year. -- PHOTO BY ERIC SMITH

Issues plaguing residential lending such as stricter guidelines and shrinking credit tend to garner most of the headlines, but the commercial sector continues to deal with those same problems.

As a result, commercial lending has declined locally and nationally, according to the latest data from the Mortgage Bankers Association and real estate information company Chandler Reports,

Nationally, commercial mortgage applications decreased 9.3 percent for the week ending June 20 and 25.3 percent from the same week a year ago, according to the MBA’s last weekly survey.

And in Shelby County, commercial mortgage lending fell 31 percent in May compared with the same month a year ago. Just 40 commercial mortgages were made in May, down from 58 in May 2007, according to Chandler Reports’ most recent Lender Analysis.

Mortgages averaged $1.2 million and totaled $46.4 million for the month, which was down significantly from May 2007’s average of $5.2 million and total of $303 million, although it marked an increase from April 2008’s average of $653,227 and total of $22.2 million.

Subprime to blame

When the residential subprime fiasco dried up mortgage-backed securities, it drastically altered the way lenders were able to offer financing on the commercial side, said Rick Wood, senior vice president at Financial Federal Savings Bank.

“All banks are reviewing loan requests more conservatively, requiring more equity and more pre-leasing when they want to judge the viability of a new request,” Wood said. “Interest rates are historically good, but the criteria for analyzing loans have become tighter, more stringent and back to the way we did business 15 years ago.”

Frank Stallworth, president of the commercial and multifamily division at Magna Bank, agreed that the residential subprime mess is to blame, and that it has taken a toll on both the number and dollar value of commercial mortgage activity in Shelby County.

“It just tainted mortgage-backed securities to the point that investors didn’t want to buy any of them,” Stallworth said. “The commercial real estate securitization really has very low delinquencies – very low. Nevertheless, that financing vehicle is gone.”

The top five commercial lenders for the month in terms of dollar amount were U.S. Bank NA with two loans totaling $16.2 million; Wachovia Mortgage (three, $13.2 million); Magnolia Federal Bank for Savings (one, $3.5 million); First State Bank of Arkansas (three, $3.2 million); and Cadence Bank (one, $2 million).

The tighter credit has resulted directly in many banks countywide experiencing a decrease in their lending totals, and therefore fewer deals being pulled by businesses that might hope to grow.

That could wind up stunting economic growth as companies that were able to secure financing a year ago are finding it more difficult in 2008.

“What we’re seeing is that acquisitions have slowed down dramatically,” Stallworth said. “The purchase of real estate has slowed down as far as office buildings, retail or multifamily. The fundamentals are still pretty good. Occupancies are good, rental rates are good, with the exception of retail, which is getting a little soft. Because of the higher equity requirements and higher spreads, it’s cut the acquisition market at least in half.”

‘Different world’

Despite the downturn, financing still exists for businesses looking to acquire real estate or make capital improvements – it’s just either harder or more expensive to obtain. And some deals simply take longer to work out.

As Wood noted, it’s important to differentiate between short-term construction loans for new projects and the long-term, fixed-rate loans on properties that are “finished, leased and seasoned,” he said. “They’re two different animals.”

“On the construction side, on new properties, lenders are really requiring pre-leasing if it’s office or retail, and they’re just underwriting more conservatively and trying to stay at that 75 percent loan-to-value and possibly 80 percent loan-to-cost,” Wood said. “And real live equity is being required on every product type.

“That’s probably something that has evolved over the last six months during the change in the credit markets where the banks are not as aggressive in their construction lending in terms of proceeds that are available.”

As for fixed-rate loans, those now are more expensive, with the exception of multifamily, which always has been perceived as the least risky category of commercial lending and more accessible, Wood said.

Certainly, it’s a different world for both the financial services industry and the businesses that rely on it to thrive and survive. And just like the residential sector, the situation in commercial lending doesn’t appear to be changing any time soon.

“I think we’ll stay here through ’09,” Stallworth said. “We’ve got another 18 months, I’d say.”