Commercial Real Estate Lending Survey

2019 COMMERCIAL LENDING REPORT Commercial Lending Report 2019

May not be reprinted in whole or in part without permission of the National Association of REALTORS®. For reprint information, contact [email protected].

Although the information presented in this survey has been obtained from reliable sources, NAR does not guarantee its accuracy, and such information may be incomplete. This report is for information purposes only.

Cover photo: Joel Filipe 2 COMMERCIAL LENDING REPORT 2019

NATIONAL ASSOCIATION OF REALTORS® 2019 LEADERSHIP TEAM

President John Smaby

President-Elect Vince Malta

First Vice President Charlie Oppler

Treasurer John Flor

Vice President of Association Affairs Brian Copeland

Vice President of Advocacy Tracy Kasper

Immediate Past President Elizabeth Mendenhall

Chief Executive Officer Bob Goldberg

RESEARCH GROUP

Lawrence Yun, PhD Chief Economist and Senior Vice President

George Ratiu Director, Housing and Commercial Research

Gay Cororaton Research Economist

NATIONAL ASSOCIATION of REALTORS® 3 COMMERCIAL LENDING REPORT 2019

CONTENTS

1 | Introduction…………………………………………………………………… 5

2 | Survey Highlights….………………………………………………………… 7

3 | Survey Results………………………………………………………………… 9

About the Survey…………………………………………… 21

NATIONAL ASSOCIATION of REALTORS® 4 1 INTRODUCTION

Photo by Joe Beck 5 COMMERCIAL LENDING REPORT 2019

ECONOMIC ENVIRONMENT GDP GROWTH

5.0 The U.S. economy continued to expand at a strong pace of 2.9 percent in 2018 from 2.2 4.0 2.9 percent in 2017 as private consumption, 3.0 investment spending, net exports, and 2.0 government spending all rose at a faster pace. 1.0 0.0 The unemployment rate continued to trend down to 3.9 percent, while inflation mildly rose to 2.4 -1.0 percent. -2.0 -3.0 Amid the solid economic growth and job creation and the slight uptick in inflation, the U.S. Federal 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Operations Market Committee raised the benchmark federal funds rate target four times in UNEMPLOYMENT AND INFLATION 2018 by a total of 1 percentage point, to a range RATES of 2.25 to 2.5 percent at the end of 2018. The 12.0 average bank prime loan rate rose to 4.9 percent 10.0 in 2018, from 4.1 percent in 2017. 8.0 6.0 The 2019 survey on commercial lending takes 4.0 3.9 place in this economic environment marked by 2.0 2.44 slightly higher interest rates and a lower level of 0.0 bank reserves held by depository institutions that -2.0 underpin the level of lending. 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Unemployment Rate Inflation Rate

AVERAGE BANK PRIME LOAN RATE 10.00 9.00 8.00 7.00 6.00 4.90 5.00 4.00 3.00 GEORGE RATIU 2.00 [email protected] 1.00 0.00 GAY CORORATON [email protected] 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

NATIONAL ASSOCIATION of REALTORS® 6 2 SURVEY HIGHLIGHTS

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• 56% of respondents reported an increase in net operating income in 2018, a decrease from 65 percent in the previous year’s survey. • 38% of respondents reported tighter lending conditions in 2018, up from 35 percent in 2017, with a higher fraction for retail stores. • 65% of respondents reported the client used debt financing to purchase a property, with higher reliance on debt financing for suburban offices and retail malls. • 5% to 7% was the average interest rate on loans. • 10years was the median loan term, except for loans by life insurance companies, at 15 years, and the Small Business Administration, at 20 years. • 75 to 80 loan-to-value ratios were common, especially for suburban offices, multi-family properties, and industrial properties. • 1.25 was the median debt service coverage ratio, with higher DSCR for retail malls. • 54% of respondents cited local/community banks and regional banks as the most active sources of financing in commercial deals.

Photo by Jesse Orico

NATIONAL ASSOCIATION of REALTORS® 8 3 SURVEY RESULTS

Photo by Joe Beck 9 COMMERCIAL LENDING REPORT 2019

Sales in the Past 12 Months

• 55 percent of respondents reported a decrease in their for sale or for lease inventory in 2018 compared to 2017. • Land made up 20 percent of properties clients bought or sold, followed by multi-family (14 percent), suburban offices (13 percent) and industrial warehouses (13 percent). Hotels and retail malls made up the lowest share at two percent each.

FOR SALE OR FOR LEASE INVENTORY IN 2018 COMPARED WITH 2017

Up Down 45% 55%

COMMERCIAL PROPERTY TYPES CLIENTS BOUGHT OR SOLD 21% 20% 19% 15% 15% 14% 14% 14% 13% 13% 13% 12% 12% 11% 11% 9% 9% 9% 8% 8% 8% 8% 7% 7% 3% 2% 2% 2% 2% 0%

2017 Survey 2018 Survey 2019 Survey

NATIONAL ASSOCIATION of REALTORS® 10 COMMERCIAL LENDING REPORT 2019

Net Operating Income

• 56 percent of respondents reported an increase in net operating income (NOI) in 2018 from the level in 2017, a decrease from 65 percent of respondents who reported an increase in NOI in 2017 compared to 2016. • By type of property, industrial properties had the highest fraction of respondents who reported an increase in NOI, while hotel and retail mall transactions had the lowest fraction of respondents who reported an increase in NOI.

CHANGE IN NET OPERATING INCOME 67% 65% 56% 32% 28% 25% 13% 8% 7%

INCREASED SAME DECREASED

2017 Survey 2018 Survey 2019 Survey PERCENT OF RESPONDENTS REPORTING AN INCREASE IN NET OPERATING INCOME 62% 62% 58% 58% 57% 57% 56% 49% 49% 38%

NATIONAL ASSOCIATION of REALTORS® 11 COMMERCIAL LENDING REPORT 2019

Lending Conditions

• 38 percent of respondents reported tighter lending conditions in 2018, up from 35 percent in 2017. • 58 percent of respondents reported that lending conditions tightened for retail stores (34 percent for retail strip centers; 24 percent for retail malls). Industrial property had the smallest share of respondents that reported tighter lending conditions, at 13 percent (8 percent, warehouse; 5, percent flex). The survey findings are indicative of the challenges faced by the retail sector and the strong demand for industrial properties on account of the robust expansion of e-commerce sales.

LENDING CONDITIONS IN PAST 12 MONTHS 41% 40% 39% 37% 36% 35% 29% 23% 20%

TIGHTENED NO CHANGE EASED

2017 Survey 2018 Survey 2019 Survey

WHAT PROPERTY TYPES (IF ANY) DID YOU SEE LENDERS TREAD SLOWER ? 34% 31% 24% 20% 18% 18% 11% 8% 6% 5%

NATIONAL ASSOCIATION of REALTORS® 12 COMMERCIAL LENDING REPORT 2019

Lending Conditions

• 33 percent of respondents reported they had a failed transaction due to lack of financing. • 54 percent of those who reported a failed sale transaction reported retail mall transactions, and 44 percent reported retail strip center transactions. The smallest fraction of reported failed sales transactions were CBD offices, at 29 percent. Multiple responses are allowed so the shares won’t sum up to 100 percent. • Loan/underwriting requirements was cited by 54 percent of the respondents as the reason for the failure, followed by financing availability (18 percent), appraisal (15 percent), and other reasons (10 percent). PERCENT OF RESPONDENTS WITH A FAILED SALES TRANSACTION DUE TO LACK OF FINANCING 36% 35% 33%

2017 SURVEY 2018 SURVEY 2019 SURVEY

PERCENT OF RESPONDENTS WHO REPORTED A FAILED SALE TRANSACTION DUE TO LACK OF FINANCING 54% 44% 43% 37% 37% 36% 35% 34% 32% 29%

NATIONAL ASSOCIATION of REALTORS® 13 COMMERCIAL LENDING REPORT 2019

Type of Financing

• 65 percent of respondents reported the client used debt financing to purchase a property. • By property type, over 80 percent of retail malls and suburban office transactions were debt- financed, while only about two-thirds of hotels, industrial properties, land, and CBD offices transactions were debt-financed, with equity (cash) accounting for a larger portion of the financing.

FINANCING 65% 63% 62% 30% 27% 24% 11% 10% 8%

EQUITY: 100% CASH DEBT FINANCING OTHER

2017 Survey 2018 Survey 2019 Survey

PERCENT OF PROPERTY SALES THAT WERE DEBT-FINANCED 86% 83% 75% 75% 69% 68% 68% 66% 65% 58%

NATIONAL ASSOCIATION of REALTORS® 14 COMMERCIAL LENDING REPORT 2019

Interest Rate and Loan Term In Years

• 50 percent of debt-financed sales in 2018 had an average interest rate of five to seven percent, up from 33 percent in 2017. This result is consistent with the rising interest rate environment in 2018. • Respondents reported that the median loan term among lenders was 10 years, except for life insurance companies, 15 years, and the Small Business Administration, 20 years.

AVERAGE INTEREST RATES CHARGED FOR DEBT FINANCING 69% 65% 50% 47% 33% 29% 2% 2% 2%

UP TO 5% HIGHER THAN 5% TO 7% HIGHER THAN 7%

2017 Survey 2018 Survey 2019 Survey

MEDIAN LOAN TERMS IN YEARS 20 15 10 10 10 10 10 5.25

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Loan-to-Value Ratio

• 60 percent of respondents reported that lenders used the loan-to-value (LTV) ratio as the criteria for determining the loan amount; the rest used the debt service coverage (DSC) ratio or the smaller of the loan amount using the DSCR or the LTV • By property type, a higher fraction of loan amounts for industrial warehouses, land, and offices were determined using the LTV criteria compared to other property types

LENDERS’ LOAN CRITERIA USED TO DETERMINE LOAN AMOUNT 62% 60% 59% 27% 24% 23% 16% 16% 14%

LOAN- TO- VALUE (LTV) DEBT SERVICE COVERAGE THE LOWER LOAN RATIO (DSCR) AMOUNT BETWEEN LTV OR DSCR

2017 Survey 2018 Survey 2019 Survey

SHARE OF LOANS THAT USED LTV CRITERIA TO DETERMINE LOAN AMOUNT BY PROPERTY TYPE 64% 63% 61% 59% 58% 58% 57% 55% 54% 45%

NATIONAL ASSOCIATION of REALTORS® 16 COMMERCIAL LENDING REPORT 2019

Loan-to-Value Ratio

• Of the reported transactions where the loan amounts were determined using the LTV ratio, 62 percent had LTV ratios of 75 percent or 80 percent. • By property type, suburban office, multi-family, and industrial properties had the highest fraction of loans with LTV ratio of 75 or higher, while at most half of retail stores and hotel loan amounts had an LTV ratio of 75 or higher.

LOAN-TO-VALUE 40%

35% 33%

30% 29% 25% 20% 16% 15% 10% 6% 6% 5% 3% 5% 2% 1% 0% 90% 85% 80% 75% 70% 65% 60% 55% 50%

2017 Survey 2018 Survey 2019 Survey

PERCENT OF LOANS WITH LOAN-TO- VALUE RATIO 75 OR HIGHER 79% 69% 65% 63% 62% 62% 62% 54% 50% 45%

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Debt Service Coverage Ratio

• The median debt service coverage ratio was 1.25. • By property type, retail malls appeared to have a slightly higher debt service coverage ratio compared to other properties, while land transactions had the lowest debt service coverage ratio.

MEDIAN DEBT SERVICE COVERAGE RATIO 1.25 1.15 0.80

2017 SURVEY 2018 SURVEY 2019 SURVEY

MEDIAN DEBT SERVICE COVERAGE RATIOS 1.28 1.25 1.25 1.25 1.25 1.25 1.23 1.23 1.23 1.20

NATIONAL ASSOCIATION of REALTORS® 18 COMMERCIAL LENDING REPORT 2019

Lenders

• Local/community banks comprised the biggest source of lending, at 30 percent, followed by regional banks, at 24 percent in the 2019 survey (2018 reference year). • National banks accounted for 12 percent, although the share increased from six percent in the 2018 survey (2017 reference year). • Private investors made up 10 percent, and credit unions eight percent. • The Small Business Administration accounted for six percent of reported transactions.

SOURCES OF FINANCING

35% 30% 30% 25% 24% 20%

15% 12% 10% 8%

10% 6% 4% 2% 1% 1% 1%

5% 1% 0% 0%

2017 Survey 2018 Survey 2019 Survey

NATIONAL ASSOCIATION of REALTORS® 19 COMMERCIAL LENDING REPORT 2019

SBA Lending

• 19 percent of respondents reported a client who had used an SBA lending program in 2018: 18 percent, 7(A); 9 percent CDC/504; and 1 percent, microloan • Among those who reported they did not have a client who used an SBA lending program, 66 percent reported that the client had other sources of financing. Three percent reported the client did not know the SBA program existed.

DISTRIBUTION OF CLIENTS WHO USED SBA LENDING PROGRAMS 71% 68% 63% 22% 18% 16% 15% 13% 9% 2% 1% 1% 1% * *

YES - 7(A) YES - CDC/504 YES - YES - DISASTER NO MICROLOAN LOAN

2017 Survey *less than one percent

REASONS CLIENT DID NOT USE SBA LENDING PROGRAMS 66% 61% 56% 22% 18% 15% 13% 13% 11% 6% 5% 4% 4% 3% 3%

DID NOT KNOW BURDENSOME DUE TO PAST CLIENT HAD OTHER THE PROGRAM APPLICATION SBA OTHER EXISTED AND EXPERIENCES SOURCE(S) OF REPORTING FINANCING REQUIREMENTS

2017 Survey 2018 Survey 2019 Survey

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ABOUT THE SURVEY

In March of 2019, NAR sent out the online survey DESIGNATIONS OF to nearly 70,000 REALTORS® with an interest in commercial real estate. The objective of the RESPONDENTS IN THE 2019 survey was to gather information about their COMMERCIAL LENDING commercial transactions with international clients SURVEY during the period January –December 2018. A total of 1,009 responses were received for an ALC, 2% overall response rate of 1.4 percent. CCIM, 13%

Of the 1,009 respondents, 573 or 57 percent had CPM®, 4% a sale and were asked questions about their CRE™, 2% transactions. Respondents had a median of four Other SIOR, 3% transactions during the year. The average sales designations, transactions value was less than $ 1 million. 78%

Based on the 573 respondents, the margin of error for estimating proportions (using 50 percent sample estimate) at the 95 percent level of confidence is 4 percent. The margin of error for sub-groups estimates (property types) will be higher.

DISTRIBUTION OF AVERAGE VALUE OF SALES TRANSACTION 65% 64% 64% 20% 18% 18% 10% 10% 9% 5% 4% 4% 4% 3% 2%

UNDER $1,000,000 - $2,000,000 - $5,000,000 - OVER $1,000,000 $1,999,999 $4,999,999 $10,000,000 $10,000,000

2017 Survey 2018 Survey 2019 Survey

NATIONAL ASSOCIATION of REALTORS® 21 COMMERCIAL LENDING REPORT 2019

The National Association of REALTORS® is America’s largest trade association, representing more than 1.3 million members, including NAR’s institutes, societies and councils, involved in all aspects of the real estate industry. NAR membership includes brokers, salespeople, property managers, appraisers, counselors and others engaged in both residential and commercial real estate.

The term REALTOR® is a registered collective membership mark that identifies a real estate professional who is a member of the National Association of REALTORS® and subscribes to its strict Code of Ethics.

Working for America’s property owners, the National Association provides a facility for professional development, research and exchange of information among its members and to the public and government for the purpose of preserving the free enterprise system and the right to own real property.

NATIONAL ASSOCIATION OF REALTORS® RESEARCH GROUP The Mission of the NATIONAL ASSOCIATION OF REALTORS® Research Group is to produce timely, data-driven market analysis and authoritative business intelligence to serve members, and inform consumers, policymakers and the media in a professional and accessible manner.

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22 2019 COMMERCIAL LENDING REPORT