A pair of financing professionals recently shared good news with Midwest Real Estate News: Financing dollars for commercial real estate projects are getting easier to come by. Here’s what Jim Doyle, senior vice president at Cleveland-based Bellwether Enterprise Real Estate Capital, and Suzanne Martinez, principal in the capital markets group of the Chicago office of Avison Young, had to say about the state of commercial real estate financing in 2013.
Midwest Real Estate News: What do developers need today to receive financing for their projects?
Jim Doyle: Their experience and balance sheet are the keys. That’s something that lenders got away from a little bit in the heyday. But that is the focus today. Suzanne Martinez: Clearly most folks like to see a good solid anchor in place. But the requirements are different when you’re talking about different asset classes, say office and industrial. There is such demand for industrial right now that a spec development could be well-received and qualify for financing. For most asset types, though, having a good solid anchor is one of the key things to getting your deal done.
MWREN: What can developers do to increase their odds today of receiving the financing that they need? Doyle: Well, financing does seem to have opened up. Anything on the commercial side that is occupied at break-even or greater has a great opportunity to get financing today. Even if you have a lesser balance sheet or lesser experience, if you have something that has a strong level of pre-leasing it should get financing.
MWREN: What kind of projects are you seeing receiving financing today?
Martinez: Everybody today is focused on all asset classes. There has been a big push for industrial. Well-located industrial is easy to underwrite today. It’s easier to finance. The other big focus is in core office. The demand for core office today far outweighs the available supply of core office. That’s been a key area of focus when it comes to commercial financing. Of course, multi-family has been white-hot, too. That will just continue for the rest of this year. Doyle: Multi-family is certainly the leader. Industrial seems to be strong, too. But we are seeing all sorts of projects receive financing. Even hotels, self-storage facilities, parking garages, a variety of projects are receiving financing. Multi-family, though, thanks to the support of Fannie and Freddie, is still leading the way. Through this year, multi-family has remained a hot asset class. It will remain that way probably until the time that new homes start to rebound and renting becomes less important again. This year, though, multi-family is still a huge component.
MWREN: Since the recession, what changes have you seen with commercial lending? Doyle: It’s not too different, really. There is more of a focus now on leverage. The underwriting is also focused more on actual historical numbers versus the story that developers were telling, developers estimating what rents and vacancies would be in the future. There was a time when the market started underwriting out to future rents. Now it is focused on historical numbers and on what has been there in the past and what’s in place today. I think that is a positive change.
MWREN: Are there any market sectors in which developers are still struggling to obtain commercial financing? Martinez: The Chicago suburban office remains a really big challenge. There have been some deals here, usually in corporate campuses that are still doing well. In general, though, investors tend to shy away from the suburbs. Occupancies can be tougher there than in downtown.
MWREN: Are banks becoming more active again in commercial lending? Doyle: The banks have been slow to get back to full capacity, but they are getting there. The banks are continuing to ratchet up their lending. As each year goes on, our competition is starting to show itself again.
MWREN: Are you seeing any other interesting trends in commercial financing? Martinez: We are seeing a lot of foreign investors entering the market. Foreign capital flow into the United States was strong in 2012. They are investing in multi-family, residential, office and industrial assets. In Chicago, we’ve seen plenty of examples of offshore money coming into commercial real estate projects. We’ve seen a lot of Korean and Canadian money coming in. The United States, of course, still has its own debt-ceiling crisis. But when you think of the crises that European countries are going through, the United States is still seen as a safe haven. Confidence in the United States will continue. In Chicago, you saw three or four significant offshore investors come into the marketplace last year. They even came to the suburbs.
MWREN: To sum up, are you optimistic about the state of the commercial real estate industry today? Martinez: Well, you can’t be pessimistic in the beginning of the year, can you? My sense of this market is that there is a tone of optimism out there. You are still not seeing big strays from the middle of the fairway. When you listen to folks on financing and investment panels, you hear that they are investing their money in core major-market investments. Spec and suburban investments are still largely too iffy. In my opinion, the market is not necessarily going to get better very fast. But the market will continue to improve