Investors and lenders are taking a new look at commercial property transactions in smaller markets across the U.S. While core real estate markets in big cities remain their top choice for many projects, nowadays it's not out of the question to find financial institutions or commercial investors who want to sink some money into traditionally smaller areas.
More Options Now
As recently as three years ago there were fewer options for someone who either wanted to borrow money for a commercial real estate venture or be the operator of one in the smaller tertiary markets. That's because lenders were concerned these markets would not bounce back to life as quickly as the larger markets, such as New York City or San Francisco for instance.
The CEO of George Elkins Mortgage Banking Co. in Los Angeles, Jeff Hudson, told National Real Estate Investor magazine recently that small markets were basically “redlined.”
Investors were concerned about lending money for projects in those cities that typically had populations of less than 50,000 or 100,000, depending on the location.
Much of that is behind us now that the overall economy is generally strengthening. Property.com sees the smaller markets opening up as the competition in primary and secondary markets is heating up, so commercial investors and lenders have a fresh new eye on smaller cities where higher yields may be available.
Of course lenders would much rather finance commercial property in, say, Raleigh, N.C., than Utica, N.Y. But with today's lender's more in-depth parameters and evaluations in smaller cities, the odds are better and the options have increased in those tertiary markets. George Elkins Mortgage Banking bears out that concept with its recent financing on properties in Prescott, Arizona (population 40,000), and Rapid City, South Dakota (population 70,000).
'Relationship' Lending
In many cases, commercial investors in small markets are lending because they have a long-standing relationship with the borrower or operator. So when you look at some of these transactions you'll find regional or local lenders winning out many times over national lenders who do not know the locals.
Also, lenders have more money to spend these days. With bugger budgets come bigger ideas in search of bugger returns on investment.
But relationship banking doesn't necessarily mean doing business with a lender over a lengthy period. Millbrook Properties is a good example. This Long island, N.Y.-based real estate firm wanted to buy commercial property in Marietta, Georgia, to build a retail strip. They turned to People's United Bank whom they had built a strong relationship in just over 18 months.
After nine deals with the bank, Millbrook asked for another $5.5 million to buy the property for the retail strip. People’s United was happy to finance the project based on the good rapport it had with Millbrook.
Another aspect of relationship lending is that most of these institutions will finance projects out of its core coverage area, or footprint, which is not something all lenders will do.
With People’s Bank headquartered in Connecticut, and having its core market in the New England and New York areas, bank officials decided their relationship with the 80-year-old real estate management, acquisition and development firm was strong enough to finance projects out of state.
Flexible Lenders
Other institutions, such as KeyBank Real Estate Capital, will lend money in all 50 states, so geography is not an issue, according to a Commercial Observer report. The company has 27 regional commercial real estate lending offices to create and maintain those long-distance relationships. Headquartered in Cleveland, Ohio, the bank matches its borrowers with their nearest regional office. From that standpoint, the regional office essentially “follows” that borrower to assist in the financing he or she needs no matter where they want to go.
That built-in flexibility has assisted a Chicago-based borrower secure a $26 million construction loan for a North Carolina commercial property, the Observer report noted, and another $32 million went to an Indiana-based company who wanted money for an industrial building in Massachusetts.
Commercial Mortgage-Backed Securities
National Real Estate Investor also recently noted that commercial mortgage-backed security lenders are getting into the small markets as well. The George Elkins firm for example recently arranged $7 million in such financing in Tupelo, Mississippi, where a lender is developing a commercial property whose early tenants include Hobby Lobby, Office Max and TJ Maxx. Tupelo is an extremely small market with a population under 36,000. So the opportunities exist, but it may be more a matter of who you know, and whether they have the right type of loan, in order to get your hands on the money.
Prices Up in Core Markets
Another reason investors are taking another look at small markets is the sky-high prices they are seeing in places like Los Angeles, Chicago and other large metros. And apparently there is no end in sight in the near future.
As the populations in bigger metropolitan urban areas continue to grow, so too does the demand for commercial properties.
That in turn will keep prices going up and up over the next decade or so, according to a managing director for Jones Lang LaSalle as told recently to National Real Estate Investor magazine.
The bottom line is if you're looking for commercial investors for your small-town project, now may be a good time to strike up a relationship with a lender who has an open mind for tertiary markets. If you're in a large metro you can still find loans for commercial properties, but you’ll also find more competition from cash buyers who are snapping up land while borrowers are waiting on decisions from bankers.
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