‘Solid’ Small-Balance Originations

First quarter small-balance loan volume grew 3.1 percent year-over-year–indicating strong economic and real estate fundamentals–said Randy Fuchs, Principal with Boxwood Means, Stamford, Conn. 

The gain over first quarter 2015 is noteworthy because last year produced a record $181 billion of loan originations under $5 million, Fuchs said.

Fuchs noted that smaller loans–those under $1 million–represented 72 percent of the roughly 48,000 individual deals under $5 million completed during the period. Average loan sizes for these smaller commercial and multifamily mortgages increased slightly from last year to $286,000 on average. 

Private lenders also increased their share of small-balance originations, Fuchs said, noting that the top 20 small-balance lenders commanded 23 percent of total origination volume during the quarter, down 50 basis points year-over-year and a sign of intensifying competition. “Private lenders grabbed 2 percent of the market–the most on record since Boxwood began tracking small balance originations in 2005–and as a group rose to third in the rankings, right behind JP Morgan Chase and Wells Fargo,” he said.  

Not surprisingly, private lenders had the smallest average loan size among the 20 most prolific small-balance commercial lenders, as these deals tend to fund more modest-sized acquisitions in secondary and tertiary markets, along with recapitalizations and interim/bridge financings, Fuchs said.

While the top 75 lenders account for just 37 percent of the national market, leaving bountiful opportunities for other lenders, Fuchs called the competition for deals at the local level fierce. Boxwood Means recently reported on how much more concentrated small balance lending is among lenders at the state level and suggested that national lenders should be more selective in picking markets to operate in. 

“The compression in bank market share coupled with an uptick in private lending over the past two years reveals a slowly shifting landscape for conventional commercial mortgage lending,” Fuchs said, noting that federal regulations have raised the bar for capital risk mitigation which forces commercial banks to dial back their loan appetite. Since commercial banks have traditionally dominated the small balance lending space, any retreat by banks from the market will affect small-cap CRE borrowers and investments, he said. 

“Nevertheless, the mood among the roughly 250 attendees at the Mortgage Bankers Association’s inaugural Small Balance Lending conference last month was demonstrably upbeat,” Fuchs said. “With early reports indicating a robust second quarter for space market fundamentals, we expect that small cap commercial real estate rents and property income will still be rising, paving the way for solid loan origination volume during the second half of the year.”