Are We Finally in a Stable Lending Environment?
Peter Slaugh is the president of Steelhead Capital who is heading upstream just like its namesake. They provide both commercial loans and apartment loans and Peter is excited to see investors and lenders, alike, getting back into the game after a long hiatus. As you can see, when he’s not pouring over spreadsheets, Peter lives for a healthy trout jumping on the end of his line.
2007 was a harsh wake up call for many of us in the commercial lending business. In the years before the bubble burst, frivolous lending practices led to an increase in acquisitions, construction, and the strongest sellers’ market that we’d seen in a long time. Thanks to Freddie and Fannie, CMBS, life companies, banks, and other private lenders who offered low interest rates – the general attitude was that anyone could get a loan and buy property. But once 2007 came around and rents started to decline it was evident that these loans were unaffordable to many investors and they started defaulting which led to the collapse.
Granted I’m only skimming over the reasons of the collapse and in truth there are hundreds of reasons that America is in the economic state it’s in, but it helps to paint the picture for where we are now – May 2013 where there are plenty of promising signs that show we many finally be in a stable lending environment yet again, and here’s why.
Multifamily Sector is Strong
A growing trend has happened for commercial investors and that is the strong support for multifamily residences. Backed up by a report by ULI for 2012, we’ve seen that lenders are much more likely to give funds for multifamily development. What this shows is a shift in both American investors, as well as buyers. Before the bubble collapsed, everyone was obsessed with owning, buying, and selling single family homes and private residences. The crash showed us that this is not sustainable and now we’re shifting away from that practice by investing in more stable, long term focused apartment buildings and urban villages.
Local Banks Getting Back Into the Action
While Freddie Mac, Fannie Mae, and the Department of Housing and Urban Development (HUD) still command the majority of the market share when it comes to multifamily lending; CMBS, life companies, as well as regional banks are starting to get back into the lending game. The fear to lend (which struck many lending agencies, especially small banks) stops money from going back out into the system. The cliché stands, you need to spend money to make money, and if you have no capital to spend and can’t get a loan from a bank, well you get the idea. We’ve seen a rising trend in late 2012 and in this first quarter of 2013 that shows an increase in the number and amount of commercial loans that small banks are making. They’re still nervous, which is a good thing because we don’t want another repeat of 2007, but they’re willing to help the experienced borrower who as the balance sheets to offset the market risk.
These signs point to a more stable lending environment that we haven’t seen in a long while. Pre 2007 we had a skewed version as lenders where giving loans to anyone with a pulse, and after the crash it was skewed in the opposite direction as lenders were unwilling to make loans. Now the water is warming up again but we need to be careful to not let the pot boil over again. Smart lending and investing means a steady simmer and focusing on long term, sustainable strategies.