While lending has picked up for large commercial real estate transactions, borrowers seeking loans for smaller deals continue to struggle to find capital, according to survey data on the lending market released this month by the National Association of Realtors (NAR).
The survey showed a significant difference in commercial lending depending on value, with borrowers finding it more difficult to finance purchases under $2.5 million. Two out of three survey respondents reported that they've had commercial real estate deals fall through due to a lack of capital. Data from the survey indicated that more than 70 percent of the respondents said a lack of available financing was the primary obstacle towards getting smaller commercial real estate transactions done.
"This is very much a tale of two markets," according to Lawrence Yun, NAR's chief economist, who added that there have been notable improvements in the amount of capital available for large commercial transactions valued at $2.5 million or higher. However, challenges remain for the smaller transactions, he said.
George Ratiu, NAR's economist and manager of quantitative and commercial research, said the lag in lending for commercial real estate properties at the smaller end of the spectrum illustrates the continuation of tougher credit standards.
"Banks are obviously blaming regulations, but at the same time, it seems to be that the underwriting standards actually continue to tighten," Ratiu said in an interview with REIT.com. "What we've learned over the last two years is that sales volume has been very depressed for smaller transactions."
Additionally, he said geographic location also played a role. Smaller deals in mid-tier metro areas are facing especially tough credit conditions as banks remain wary of risks to their balance sheets.
"With corporate profits at record highs and private funds aiming for quality, investors turned to stable markets and top-tier properties," Ratiu noted.
More than 13,000 properties valued at $2.5 million or more traded hands in 2011, according to data from research firm Real Capital Analytics. Sales volume for the larger assets increased 51 percent over 2010 to $205.8 billion, with the bulk of lending coming from big banks.