2Q Small-Balance Lending ‘Vigorous’

The small-balance lending market remains “vigorous,” with loan production accelerating during the second quarter, reported Boxwood Means, Stamford, Conn.

Sub-$5 million commercial and multifamily loan originations totaled $46.4 billion during the quarter, up 15.4 percent from the first quarter, said Boxwood Means Principal Randy Fuchs. Mid-year originations approached $87 billion, just 2.9 percent behind last year’s record-setting pace. 

“Small-balance lenders, brokers and investors have every reason to be upbeat as vigorous commercial real estate space market conditions remain buoyed by the modest pace of growth in the U.S. economy,” Fuchs said. He noted that while improved labor markets, personal income growth and business investment have turned the conversation toward an interest rate increase, a modest interest rate increase will not likely deter most borrowers, who enjoy still-rising property incomes.

Banks led by JPMorgan Chase accounted for 23 percent of total second-quarter small-balance loan origination volume, up 10 basis points from the first quarter, Boxwood Means reported. Private lenders represented the second-largest source. “Banks’ strong lending activity and stable market share during the second quarter is encouraging given growing industry concerns over a pullback due to reported tightening in underwriting standards and greater regulatory intervention,” Fuchs said. “A majority of banks remain optimistic about loan demand going forward, especially regarding commercial real estate loan growth.” 

Fuchs said banks currently show “restraint” as they head into a credit-tightening cycle at this late stage of the market expansion. “That will help keep the market from further over-heating and will also likely shift some of the loan demand further toward non-banks, specialty finance and marketplace lenders,” he said.

Fuchs noted that the “sweet spot” for this market remains loans below $1 million. “The needs of private buyers and small business real estate owners for smaller loans is always the key driver of this loan space,” he said. Loans under $1 million accounted for more than 70 percent of the 53,000 individual deals under $5 million made during the quarter. 

Boxwood’s price index for properties trading under $5 million across 127 cities rose 0.3 percent in July, its third consecutive monthly increase. Small-cap asset values are now up 3 percent year-over-year. “With prices having increased steadily if modestly for 41 consecutive months, the [small-cap] index has recovered to its December 2008 level,” Fuchs said.

Small-cap multifamily prices powered forward, rising a “robust” 0.9 percent in July and 9.2 percent year-over-year as debt capital continued to flow freely to small affordable rental housing investors, Boxwood Means reported. “Low homeownership rates due in part to low affordability, low single-family inventories and changing housing preferences have driven rental vacancies way down and rents straight up–music to the ears of small-balance lenders and investors who also find that competitive supply tilts heavily towards luxury apartment projects and not affordable ones,” Fuchs said. He noted that asset prices accelerated even further in the six largest U.S. cities, increasing 1.6 percent in July alone and 12.8 percent from a year earlier. 

Boxwood’s Small Multifamily Price Index for the 48 largest markets has now recovered 197 percent from its September 2010 trough and hovers 25 percent above its previous 2006 peak.