So you’ve decided to buy a commercial real estate property and to enter the world of real estate. What’s next?
In most of the cases, buying and selling of commercial real estate properties happen through raising different types of loans (Well, unless you’re not the owner of a million dollar company..)
Raising funds through lending has been one of the major parts of the real estate industry on a whole.
The real estate loan market is a dense subject with different trends varying from time to time. There was a time when lending money through banks for the purposes of buying a commercial real estate property was very easy.
Banks had easy policies and the whole loan approval process was much simpler and easier than it is today!
There are hundreds of factors that cause changes in the real estate loan market.
This blog is an overview of the key trends in commercial real estate loan market that you need to watch out for!
Without further ado, let’s get started!
1) The banks have further made lending policies stringent
In the past few years, the bank policies have been getting more strict for approving a loan request for the purpose of buying commercial real estate property.
This year, the banks have further made these policies more stringent by announcing a list of pre requisites that one needs to fulfill before applying for a bank loan.
The documentation and the paperwork have been reduced noticeably but the conditions to be fulfilled for one to get till there is a major issue.
A good credit score with the bank has become an almost mandatory rule for anyone to finance a bank loan for the purpose of purchasing a commercial real estate property.
Bottom-line, people who want to raise commercial real estate loans through banks will have a hard time unless they have an excellent credit score!
2) The patterns of commercial real estate loans lending may shift towards secondary and tertiary markets
Commercial real estate loans have always been more focused on the primary market till the recent past.
With the increase in the number of real estate players and the private commercial real estate loan providers, the lending trends have been changing since 2 to 3 years and there are high chances that these loans will shift towards the secondary and tertiary markets.
This means that the age old rule: Real Estate industry is for the people who have lots of money, will hold no good now.
Markets will become friendlier to the people from middle class as well. Buying and selling of commercial real estate properties would no longer remain to be the business of rich people alone.
The lending patterns are most likely to shift towards the secondary and tertiary markets this year.
3) Principle of prudence is the new fundamental rule
After so many illegal practiced that caused many people huge losses, the banks and the private commercial real estate loan providers have made it a fundamental rule to play cautious and prudent always.
The principles of conservatism and prudence have become the overriding parameter for judging if or not a loan can be financed to a particular individual.
Fundamental principles of lending, the lessons taken from the old scams have led banks framed more stringent requirements for lending to ensure the security.
As a result of this, the development projects are subject to increased scrutiny of the project layout, schedules, plans, markets, budgets and so on.
The lending requirements like letters of credit and the personal guarantee given by an existing customer or a legal attorney has become more strict than ever both in case of banks and private commercial real estate loan providers.
4) Due diligence is more important than ever now
Taking due diligence while indulging the business of real estate has remained to be an unsaid rule since the day the business of real estate came into existence.
But it mostly remained in the theory and in most cases; people have undergone huge losses simply because they paid less attention to taking extra care.
This extra care that was missing from many people was the main reason behind huge losses. Regardless of this fact, until the recent past there was still hopes for people to kiss success in real estate without taking extra care or due diligence.
But the changing trends of real estate market will no longer support this.
The fact that the secondary and tertiary markets have also made their way into the real estate industry and are most likely to penetrate the real estate market wholly, is a sure sign that there’s going to be more frauds and scams if one doesn’t be diligent in all real estate transactions.
With stringent environmental policies, the more meticulous approach by banks and private commercial real estate loan lenders, more complex developmental projects, taking any decision and actions with due diligence has become more important and prominent than ever now!
5) Small mistakes can result in loss of time as well as money
Small mistakes can result in big losses in the world of real estate. This has been the case since many years.
But now, with the increase in the number of players and the private commercial real estate loan providers, small mistakes can lead to much larger and prominent losses.
Project delays and high costs may result in increased in the potential risks. With many institutions that’re coming up with charming and so-called-irresistible offers, there’s more way for making mistakes which can be expensive in the long run.
The chances of one making a wrong decision or taking wrong actions are more than before now. Thus, one needs to take extra care while making any decisions while raising loans.
Exciting or tempting offers needs to be scrutinized well before jumping at the offer! Taking the help of experienced professionals is very suggestible.
6) Revisions are made to the High-Volatility Commercial Real Estate Regulations (HVCRE)
When the post recession lending requirements were changed, there were many revisions made especially with regards to the High-Volatility Commercial Real Estate Regulations (HVCRE).
The new revisions mitigated the possible losses that came with the housing construction losses but however gave way for more confusion.
This had given way for increased competition between the traditional banks and private commercial real estate loan lenders causing more confusion for loan borrowers.
The new revisions are made to remove such confusion causing additions and changes in the law. Before making a final decision one has to take note of these new revisions made to the post recession lending requirements.
7) Lower interest and capitalization rates
The rates of interest on loans would see a decline in the coming years due to increased competition between the local private hard money lenders and the commercial banks.
Lower rates of interest is a great advantage as it has the potential of cutting down a major portion of expenses related to the purchase of commercial real estate.
It’s a major add-on for people trying to penetrate the real estate industry by making use of the secondary and tertiary markets.
At the same time, there can be chances and space for fraud as well since every second lender wants to provide amazing offers.
This is something that calls for extra diligence by the real estate investors especially while choosing their money lender.
8) Rise in the number of alternate lenders
The alternative lenders are no longer the black sheep in the scene of commercial real estate lending.
There’s been a considerable rise in the number of alternate lenders and it’s expected to rise to great numbers this year.
This is largely because of the ease of entry of secondary and tertiary markets to the real estate industry.
Increase in the number of real estate players has led to this increase and it’s in the best interests of the loan borrowers largely because as mentioned earlier, the loan rates would see a downfall due to increased competition!
It’s good news for upper middle and lower middle class people as they can now find their loan providers easily and finally enter the real estate market!
Those were some of the trends in the commercial real estate loan market. The basic trend of loan market remains unchanged and is speculated to remain unchanged in the years to come.
Basic precautions which needs to be taken while raising a loan however remains unaltered because no matter what changes happen in the lending industry, there’s always scope for frauds which means one always has to take due diligence in dealing with commercial real estate loan transactions.