Banking Crisis Impact on Commercial Real Estate Investing

How is the recent banking crisis going to to impact commercial real estate investing? With over 80% of commercial real estate loans held in banks, investors should be paying attention. Discover 4 ways the banking crisis is directly impacting commercial real estate investing and how you can successfully navigate the choppy waters of this banking crisis.

 

Banking Crisis in America

Two American banks recently failed. Silicon Valley Bank, which holds about $200 billion in assets, and Signature Bank which has assets of $100 billion. These two banks are considered small to medium sized banks. Why does this matter to commercial investors? Well, it matters because 80% of all commercial loans originated in the US are from small to medium sized banks. As a matter of fact, I am a client of Signature Bank so the impact of this bank failure has a direct impact on me. So, commercial real estate investors need to pay attention.
 

4 Impacts of the Banking Crisis on Commercial Real Estate Investing

At Commercial Property Advisors, we are in the trenches daily with our students; working on deals, on management, acquisitions, due diligence, lending, you name it. We are involved every single day, from the East Coast to West Coast, North and South. Which means we have real time data on what’s happening around the nation. Here are four impacts of the banking crisis we are witnessing right now, and these impacts will likely increase in the future.
 

Impact 1: Banks Like Multi-Family

Every week, I am on the phone with a lender somewhere in the US and here’s what I’ve discovered in the last few weeks of this banking crisis. From a lender perspective, multifamily is still favored amongst all commercial property types. And here’s why:

1. The demand is greater than the supply.
2. It has income stability and value-growth potential, meaning the quality of the asset from the lender’s perspective remains superior to other commercial property types.
3. It is a less risky investment. Interest rates on an apartment building are lower than interest rates on a single-family home rental. What that tells us is that lenders see apartments as less risky than single-family home investing. And we agree with that 100%.

 

Impact 2: Lenders are Tightening their Underwriting

How a traditional lender will evaluate your deal once you send them the property information is starting to change. They are getting stricter with loan approval, which means they’re tightening their underwriting. Across the country banks are being more cautious because of the banking crisis. This will impact commercial real estate investing because banks will be more cautious on what kinds of deals they approve for financing. As a result, investors will need to do more creatively financed deals. That means seller financing using a master lease agreement, seller carry first mortgage, seller carry second, contract for deed, or an installment sale. Creative financing in commercial real estate is an essential skill for today’s investors. So if you are a commercial real estate investor or are considering becoming one, you need to learn how to implement these creative financing strategies.

I recently released a video training called Creative Financing Commercial Real Estate. If you watch that video you will learn the top 5 techniques to purchase commercial property with creative financing. These strategies will allow you to do deals when traditional commercial real estate financing isn’t an option, like in the midst of a banking crisis when lenders are tightening their underwriting.

For example, you may have a good deal with a motivated seller, but the property has a high vacancy. A bank will see that deal as too risky. So how do you purchase a deal like that? Or what if higher interest rates are killing your deals? What do you do? Or what if a property has deferred maintenance and has great upside potential but because the bank is more cautious, they won’t give you a loan? And lastly, let’s say that you yourself are seen as too risky. What do you do then? You structure the deal using seller financing.
 

Impact 3: Banks Will Back Off Bridge Lending

These were the exact words from my lender, “Bridge lending is going to blow up.” That’s what he told me. What is bridge lending and why is it going to blow up? Well, bridge lending is used to help investors transition a property from a poorly performing asset with potential to a stabilized asset that is cash flowing so that it can qualify for long-term financing. So if a property has a good story to it, you can purchase it with bridge lending. It provides the funding in between, bridging the gap.

Here’s a breakdown of how bridge lending works:

• You have an underperforming property; it’s not cash-flowing well, the NOI is low, you may have high vacancy, and it may need repairs.
• A traditional lender like Chase Bank is not happy with the deal.
• Maybe you are the problem; you don’t have all the money or maybe your credit is bad.
• However the property has true potential.

So how do you take this property that’s underperforming but has potential and bridge the gap to a great property? You need to get a bridge loan. Interest rates with a bridge loan are little high than conventional loans and they last from 12-18 months. The key to getting one is you need to have a great story. You must convince the lender of the property’s potential and that even though it’s not performing now, it can in the future and you have a plan to make it happen.

If you have a great story, you can demonstrate the potential, and you have a good plan, they’ll lend you the money to purchase the property so that you can get it stabilized, cash flowing and performing well. Once the property is stabilized at the end of 12-18 months, they will convert the bridge loan into a permanent long-term loan so that you can continue to create massive value over time.

The reason why my lender says this is going to blow up is because lenders are tightening up on deals that are not performing. Traditional commercial lenders are going to back off these deals with great potential that are underperforming because they are seen as too risky. And this will have a significant impact on commercial real estate investors.
 

Impact 4: Your Deal Underwriting Must Be on Point

The final impact is about you. Your deal underwriting needs to be on point. There are no room for mistakes when calculating cash flow, cash on cash return, expenses and structuring a deal. How you run your numbers must be on point now because the banking crisis has caused everything to tighten up.

• There’s no room for mistakes, especially for those of you that are over 40 because you may not be able to recover. It is the utmost importance that you get your numbers right.
• The margin for error is small in the current market: prices are still high, interest rates have gone up, and we may be entering a recession.
• You gotta know your stuff. There are no excuses. In fact, we have is a mandatory training for our students called How to Become an Expert in Your Market. It’s a training on how to make good investment decisions in commercial real estate. There are benchmarks you have hit to say yes or no on a deal in a certain market.
• A weekend seminar or a part-time coach isn’t good enough anymore. Because of the banking crisis the margin of error is extremely small. So you need to get a mentor or coach.

There’s a quote that I saw recently. It says,

“Many people go fishing all their lives without knowing that it is not fish they’re after.”

Don’t be one of those people. Every commercial real estate investor needs a mentor, and this has never been more true than it is right now. At Commercial Property Advisors we have been teaching our students these creative financing techniques as part of our Protégé Program from the beginning. Find out more about our Protégé Program here: https://www.commercialpropertyadvisors.com/protege-program/ and get help navigating through the choppy waters of this banking crisis.