Nationally, commercial rental rates have dropped by over 40% in the aftermath of the Millennium Boom, and property values have responded in proportion. Many of California’s small businesses have successfully weathered the first part of the recession by cutting jobs and inventories. Now, a large number of these businesses are taking advantage of the skyrocketing rate of commercial vacancies by moving into better located space, which has recently become available to rent or buy on terms that will further cut their operating costs.

However, property acquisition requires funding by lenders, who have been burned in this financial crisis. Most lenders are now taking greater precautions before agreeing to fund loans secured by commercial real estate.

The default rate on commercial mortgages nationwide is currently at 4.2%, according to a study from Real Capital Analytics. As a result, commercial lenders are reluctant to use more capital to originate commercial property loans unless the borrower can provide extensive security as collateral. Even the persistent borrowers who ultimately secure financing must often wait twice as long for the loan to be processed as they would have in boom times, due to the return of high underwriting scrutiny by lenders and increased oversight by re-energized government agencies.

first tuesday take: As in residential real estate, rumors of tight credit in commercial markets are likely to prove overblown. Buyers and their brokers who open up and provide abundant data to lenders on the collateral property’s value and the buyer’s creditworthiness (as a businessman or investor) are still able to find loans. While those who expect a return to the go-go lending standards of the mid-2000s will be instantly disappointed, creditworthy buyers with sufficient cash to make a large down payment on a qualifying property will be able to locate financing if they remain patient and persistent.

Lenders, both residential and commercial, only care about one thing: making loans so they can return to profitability (especially today with their cost of funds at nearly zero). Buyers who show that they are less likely to default, and who can back up their creditworthiness with hard cash for a down payment, have little to fear.

So make the offer to buy, get it accepted, and move on to the loan application process. And if the loan process collapses with the first lender, learn from it and move on to the next one. Remember: somewhere, a lender is always waiting to make that loan.

Re: “Commercial Deals Abound but Loans Are Scarce”, from the Wall Street Journal

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