Developers of commercial projects in Nevada these days are likely to field calls from a growing number of lenders eager to make loans to build or buy office buildings, retail centers and industrial projects in the booming state.
But memories remain strong of the collapse of the commercial lending market in Nevada during the Great Recession that began in 2008. Even as old lenders get more aggressive and new lenders enter the market, commercial real estate (CRE) lending isn’t close to the frenzy that preceded the downturn.
“We’ve seen tremendous growth in terms of velocity since the downturn,” said Robert Ray, senior vice president and operations manager of National Commercial Services, a specialized title insurance unit of Fidelity National Title Group in Las Vegas. “However I’d categorize the growth over the last several years as steady and healthy.”
At the root of the growth in lending is the recovery and diversification of the state’s economy.
“Las Vegas continues to evolve as a city and we’ve done a better job in the last few years in particular of diversifying our economy from being mostly reliant on tourism,” Ray said. “We’re attracting more national companies to Las Vegas and that, coupled with our friendly tax structure, attractive climate and all the amenities Las Vegas offers is once again putting us on the radar for places to live and visit.”
That growth means investors remain bullish on commercial real estate in the Las Vegas market, but Ray said some lenders appear to be hesitating because they question whether recent sharp price increases are sustainable.
“They might be taking more time to underwrite in today’s competitive environment especially considering where we’re at in the cycle,” Ray said.
Meanwhile, lending activity is steadily rising at Nevada State Development Corporation (NSDC), the non-government, non-profit that’s a Certified Development Company authorized by the Small Business Administration (SBA). It works with banks and business owners state-wide to originate, underwrite and service SBA 504 loans that finance purchases of buildings and capital equipment.
Sandy Gordon, NSDC’s assistant vice president and business development officer, said the non-profit approved 26 loans totaling $18.8 million from October of last year through March. That compares with approval of 25 loans totaling $16.2 million in the comparable period a year earlier. Using another measure, NSDC arranged the funding of 23 loans totaling $20.9 million from September through March, which compares with fundings of 24 loans totaling $18.5 million a year earlier.
Gordon explained that rising values of commercial properties across the state mean more is loaned through the SBA 504 program even if the number of loans remains constant.
Some 59 percent of the NSDC lending activity is generated in Las Vegas, with 32 percent in the Reno area and 9 percent in rural counties, mostly in the northern part of Nevada.
Driving the activity across the state, Gordon explained, are the strong economy, business expansions and re-locations into Nevada and the attractive terms and rates available through the SBA 504 program.
Another indication of the stronger economy is fewer NSDC borrowers struggle to repay their loans. “Our servicing activity has been much less than during the recession,” said Gordon. “Fortunately, we are dealing with minimal requests for deferments and minimal foreclosures.”
Jumping on the Bandwagon
All the activity in Nevada is drawing lenders from across the nation that want to join the host of players that already have established a presence in the commercial real estate lending business in the state.
The Nevada Mortgage Lending Division, which regulates lenders other than banks and insurance companies in the state, said 27 commercial brokers were licensed in Nevada as of this spring, along with 11 commercial bankers.
The numbers have remained consistent for the past few years, said Cathy Sheehy, commissioner of the Mortgage Lending Division.
The influx of out-of-state real estate investors into the Northern Nevada market has resulted in more competition among lenders, added Shelly Dunbar, an associate vice president with CommCap Advisors.
The company, with offices in Reno and Las Vegas, provides long-term financing in the $2 million to $30 million range for all types of income-producing commercial real estate projects.
“As California investors are scooping up properties in Reno, they are entering the market with their mortgage banker or lender. We are seeing more out-of-state lending sources enter the market because of out-of-state investors,” Dunbar said.
Commercial lending in the Reno-Sparks market historically has been dominated by commercial banks, Dunbar said, but other types of lenders such as life insurance companies and packagers of commercial real-estate loans are a growing presence.
“We are seeing a heavier concentration of private and hard-money lenders making more loans today due to their quick execution and more aggressive loan structure,” she explained.
Dunbar expects even more new entrants into the Reno market. “Some just have to have the right first deal to dip their toes in before they completely dive in,” she said.
In Las Vegas, meanwhile, borrowers are benefiting from increased competition for appropriately underwritten and leveraged loans, said Kyle Nagy, founder and director of CommCap Advisors.
As the correspondent for capital sources such as life insurance companies, investment banks and traditional commercial bankers, CommCap arranges financing for commercial real estate throughout Nevada.
The competition among funding sources, Nagy said, plays out on several fronts.
Most obviously, lenders compete on pricing. Interest rates on commercial real estate loans typically are determined by a spread over the rate on U.S. Treasury Bonds or the London Interbank Offered Rate — “LIBOR” for short. When competition among lenders heats up, spreads become compressed.
Lenders competing to win a loan also may be willing to lend a higher amount against the value of the property — allowing the owners to put in less of their own money and increasing their potential return on investment.
And as they search for opportunities to make good loans, some lenders today are willing to look at types of commercial real estate properties — older office buildings, for instance — that previously wouldn’t have been on their radar.
Not surprisingly, competition among lenders tends to be particularly spirited for deals that involve a quality asset with a consistently good operating history, Dunbar said.
But as investors seek properties with the potential to produce a higher yield —a project that isn’t fully leased, for instance — lenders are also getting more creative with different loan programs to satisfy this demand.
“When lenders come across a solid cash-flowing property, they find a way to sharpen their pencils,” Dunbar said.
Refinancings also contribute to the recent strength in lending activity. Dunbar said some investors, worried about the possibility of higher interest rates, have been moving quickly to lock in lower rates — even paying pre-payment penalties on their existing loans.
It’s important to remember, Nagy said, that not every lender is willing to finance every type of commercial real estate project. .
For many lenders, for instance, loans on high-quality apartment complexes are the most desirable, followed by larger industrial and distribution buildings and grocery-anchored retail centers.
Each lender has unique preferences, strengths, and weaknesses. Correctly identifying the right lender may be the most important part of the entire investment process.
That means that shifts in market demand will bring different sets of lenders into competition.
Ray said, “Volume-wise it’s definitely the industrial product in the Las Vegas area now. We’re closing a lot of construction loans, probably the most since 2007. The apartment market is still very hot and we’re continuing to see strong activity from institutional buyers flocking to our market.”
Lending for retail projects isn’t as strong, he said, perhaps because developers and lenders are trying to get a clear picture of the amount of brick-and-mortar retail that’s needed in an e-commerce environment.
“But high-profile retail, particularly triple-net lease assets, are fetching record prices and cap rates,” he notes.
Lending for construction of office projects is lagging other sectors, Ray said, although several office projects are on the horizon in the Las Vegas area.
With its statewide focus and its work exclusively with borrowers who will occupy their own buildings, NSDC sees a different mix.
Lending on industrial projects, which accounted for the largest share of NSDC’s loans as the state came out of the Great Recession, today accounts for about 28 percent of its loans, Gordon explained. .
Office projects, on the other hand, account for 41 percent of NSDC’s recent lending activity, and loans on retail properties account for 31 percent.
More aggressive lending draws more aggressive oversight. Rickisha Hightower, interim director of the Nevada Financial Institutions Division, said examiners of state-chartered banks keep a close eye on commercial lending these days.
, said examiners of state-chartered banks keep a close eye on commercial lending these days.
Commercial loans at state-chartered banks last year were equivalent to 207 percent of the banks’ capital, Hightower said. While that’s down substantially from the 400 percent of capital represented by commercial real estate loans in 2009, it’s still above the national average of 126 percent of capital.
Hightower said state banking officials monitor institutions’ quarterly call reports to see which banks in the state are loading up quickly on commercial real estate lending.
“Banking institutions that have experienced recent, significant growth in commercial real estate lending will receive closer supervisory review than those that have demonstrated a successful track record of managing the risks in commercial real estate concentrations,” she said.
Another red flag to state bank examiners comes when institutions put a lot of their eggs in one basket, making unusually high percentages of their loans into a single type of commercial project.
Self-discipline among lenders is important, too. “Lender underwriting discipline is vital to a healthy and enduring market. The 2008 recession is a perfect case study of overzealous lenders,” said Nagy.
The woes of the commercial real estate market during the recession left a cloud that lingered over the sector for years. But it’s finally going away.
“Most of the hair has been waxed from the troubled assets since the reset and, if anything, transactions today seem to be cleaner,” said Ray. “There will always be some transactions that may involve some legacy issues, but it’s extremely rare we can’t work through the challenges and get them closed.”
Now, Nagy believes growth in development and lending is based upon solid underwriting and realistic market assumptions. Despite the solid competition for good lending opportunities, Nagy said lenders are not willing to lower their standards. “They are still underwriting to the same ratios,” he said.
Dunbar added, “The Great Recession is still on the forefront of lenders’ minds, and they are not going to make risky commercial loans like they did pre-recession. They want to make sure borrowers have ‘skin in the game.’”
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