Lenders shy away from condos, but not much else
Those that specialize in green projects and bridge financing find opportunities
Portland Business Journal - by Wendy Culverwell Business Journal staff writer
Commercial lenders are filling a gap left by banks that have tightened loan requirements in the face of the subprime lending crisis.
Several local lenders are avoiding condominium construction, but are still interested in offices, apartments and industrial real estate.
State figures indicate nonresidential construction is growing at a 5.4 percent rate each year. This year, according to office market research by the Portland office of Grubb & Ellis, commercial construction eclipsed residential construction for the first time in five years.
"As we talk to our developers, I've been expecting things are going to slow down a bit, but they say they're going forward," said David Williams, president of Portland's ShoreBank Pacific.
By one estimate, some $30 billion in commercial mortgage-backed securities has no takers, forcing the lenders to hold the balance on their books. The result: Interest rates are hovering between 6.4 percent and 7 percent and underwriters are less willing to loan more than 75 percent of the value of the project than they have been in recent years.
ShoreBank favors commercial deals involving properties away from core business areas. It particularly likes developers building with sustainable materials and practices. The bank has a commercial lending program that allows it to fund sustainably designed projects even if the developer isn't putting up 25 percent of the equity.
Case in point: ShoreBank provided the construction loan for Graham Street Lofts, a $4.3 million 12-unit condominium project at Graham and Northeast Martin Luther King Boulevard.
The project had plenty to give lenders pause. It is being developed in an untested neighborhood by architect Hilary Mackenzie, who previously built houses. Mackenzie is also using concrete building blocks in place of steel or wood-based framing.
"That's a good project," said Williams, who called it an example of a builder doing something new and challenging.
In a similar fashion, President Rance Gregory said NBS Real Estate Capital is busier than ever in part because primary lenders are more likely to stick to their guns when it comes to debt ratios.
Concerned about being overextended, banks are refusing to place more than 70 or 80 percent debt on a property. That opens the door to firms such as his that provide loans and investments to bridge the gap, so-called mezzanine financing.
NBS Real Estate Capital invests in a variety of commercial properties on behalf of its two investment funds, Morrison Street Funds 1 and 2.
NBS Real Estate Capital has closed two mezzanine loans in the past month. The first, for $1.09 million, was packaged with a senior mortgage from Bank of America to buy a 96-unit apartment complex in Lakewood, Wash.
In the other, its $1.35 million mezzanine loan was packaged with a senior mortgage from an Arizona-based bank to fund the purchase of a 132-unit apartment complex in Mesa, Ariz.
"Business has picked up a lot because of the residential crunch," Gregory said. "We're doing a lot of mezzanine lending as a result."
Lenders, though, are shying away from condominiums.
Since its inception, NBS Real Estate Capital has funded just one condominium project. Seeing trouble in the overbuilt market, it stopped considering residential condominiums several years ago.
Gregory continues to favor apartments because so little supply was added during the boom in condominium construction. As a result, both apartment occupancy and rental rates are up. Around Portland, the vacancy rate for apartments is below 3 percent in most neighborhoods
Nelda Scott Newton, vice president of Wells Fargo's Portland-based Real Estate Group, said the bank continues to loan on office, subdivisions, apartments, land, industrial and so forth.
She said the market is solid in Portland for office and industrial property. Both rents and occupancy rates have risen. For Class A office space, the vacancy rate is about 5.6 percent. The industrial vacancy rate is about 6.9 percent and dropping in the face of record leasing activity.
Downtown hasn't seen a new office tower since 2000, although that is about to change with a handful of new buildings in the early stages of construction and development.
"Only now are we really seeing vacancies low enough to justify new office," she said.
The same thing is true in the industrial sector, with the added benefit to owners that the market is severely constrained by the urban growth boundary.
The only real estate product that has really showed signs of slowing is residential land. With the pace of sales slowing, home builders aren't out buying up land for future development.
Mike Glanville, chairman and chief executive officer of Q10 National Mortgage, a Portland-based commercial lender, said that since his firm chiefly lends on behalf of 20 or so life insurance companies, it isn't dependent on the market for commercial mortgage-backed securities.
Glanville said his firm can lend on just about anything but condominiums, and offers loans for $1 million to $25 million. He said he hasn't seen an unusual number of commercial loans in trouble.
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