By Nick Bjork
PORTLAND, OR — When Ken Griggs, executive vice president of mortgage banking at NAI Norris, Beggs & Simpson, searched for a lender to finance a $4 million industrial property transaction earlier this year, he was shocked to find a competition between eight loan providers.
Perhaps more surprisingly, all were life insurance companies.
Increased regulations and backlogs of bad assets have left many banks on the sidelines while nontraditional lenders step up. And many industry professionals believe these different types of financing will help spur development.
“Financing is the number one problem in commercial real estate right now,” said Gary Griff, senior director of the Capital Markets Group at Cushman & Wakefield of Oregon. “It’s not about vacancy or a lack of need for projects; it’s about financing.”
Over the last year, Griff said, financing has become available for smaller projects, under $3 million, and larger ones, over $10 million – but less so for projects in between, he said.
Many federal subsidies exist for smaller projects. One of these is the Small Business Administration 504 loan, which lets a business buy a building with SBA guaranteed money as long as the business occupies at least 50 percent of the space.
Griff recently closed a deal that used this loan. The SBA covered 90 percent of the $2.3 million a pediatrician needed to purchase Bethany Court, a Class A office building in Beaverton. The company now occupies 80 percent of the space and is the landlord for the rest.
Conversely, larger projects tend to be purchased by pension funds and real estate investment funds, where cash is pooled.
“The problem in this market is that the majority of product is in that middle ground,” Griff said. “You are starting to see things move in New York, Boston and San Francisco, because there are a lot of these large projects in these cities.
“But in Portland there are very few buildings that meet the minimum threshold for these (lenders) to even take a look at.”
But even middle-ground prospects are improving.
“The life insurance model is starting to catch on for the projects in the fat of our market, $2 million to $10 million,” Griggs said. “As banks have backed off a lot of projects in this range because of regulation, the life insurance companies have lowered their rates and are starting to compete.”
Life insurance companies so far are financing projects on the safer end of the risk-reward spectrum, but they are also offering favorable interest rates, Griggs said. He recently closed three deals between $4 million and $12 million; all were financed by life insurance companies with a fixed interest rate between 5 and 5.1 percent.
“Because there’s so much capital out there, and very few buildings making it to the market, lenders are starting to compete for the good projects,” he said.
While financing is starting to pick up, John Petersen, president of the Capital Group at Melvin Mark Cos., believes it will pick up even more over the next year.
“Lenders are still obviously concerned about risk with what happened over the last few years,” Petersen said. “But there’s a lot of cash out there and while lenders are doing a better job of risk pricing, everything is still (able to be financed), in my opinion.”
Some lenders – like loan cores and fund cores – are pooling resources to lend to riskier projects at higher rates. These loan cores operate much like pension funds by pooling cash. But instead of purchasing the money, they lend it and are paid dividends with interest earned on loans.
Petersen – who just returned from the 13th annual Western States Commercial Real Estate Finance Conference – said lenders are becoming eager to finance real estate.
“The number of transactions is still down, but these lenders have told me that they are definitely looking to put a lot more cash out over the next year, especially in commercial real estate,” he said. “We’ve passed the bottom and commercial real estate is looking more viable each day.”