June 29, 2016

The Small Balance CRE Market is About as Strong as It Can Get.

I just returned from MBA’s inaugural Small Balance Lending Summit 2016, where approximately 250 attendees gathered in Chicago to discuss all forms of small balance commercial real estate finance with a focus on multifamily. The conference was upbeat, with many feeling like it was a “coming out” party for this long-overlooked – but vital – corner of the commercial real estate finance industry.

SBL Market Fundamentals

The small balance CRE market* is about as strong as it can get. Randy Fuchs, Co-Founder of research and analytics shop Boxwood Means provided a buoyant overview of the current state of the small balance lending markets:

• 2015 loan volume was $181 billion. Q1 2016 started strong with lending volume at $40 billion.

• SBL remains a very fragmented market. In 2015 the top 15 lenders accounted for only 23% of SBL loan volume

• Small cap rent growth is strong, with some rents (warehouse & industrial) up 6% year over year

• Small cap CRE prices are more highly correlated with housing markets than with institutional CRE markets and have historically been less volatile than large cap CRE.

* Boxwood Means defines small balance as commercial properties valued at less than $5 million.

SBL Market Participants

• The largest lending cohort in SBL is community/regional banks. Given their low cost of funds, community banks can beat anyone – even the agencies – on price. In today’s competitive environment some banks will budge on recourse, and many will stretch on term, but in a welcome note of rationality, very few bank lenders are offering interest-only terms.

• Outside of multifamily, the long list of lenders competing for market share in the SBL market is filled with community banks, securitized lenders, marketplace lenders and even some insurance companies.

The Final Word For Modern Funding Clients

The SBL finance market is highly fragmented and includes traditional lenders who have been around for decades and new alternative lenders who take a more innovative approach to this unique asset class. Survivors of the last credit cycle know SBL must be approached with fundamental commercial real estate analysis. Technology can assist in certain processes but shortcuts adopted from consumer lending – like a reliance on FICO scores or automated property valuations – are fraught with risk.

SBL lenders rely on mortgage brokers to generate the bulk of their loan leads. However, many brokers in the space are “mom and pop” shops that don’t have the reach into hundreds of lenders across the breadth of the real estate capital markets. Modern Funding has relationships with many types of lenders with a variety of loan products across the credit spectrum. We always have lenders who are actively seeking good projects to finance and now is a great time to secure financing for your small balance commercial real estate project.

–David Roover