Top o’ the Market to You
Private lenders may be well-positioned to help brokers find the upside of a down market
By Kurt Lefteroff, principal, Secured Private Capital LLC
Although many commercial
lenders have restricted their guidelines or stopped lending altogether,
there still is one area of lending where brokers can help their investor borrowers find
funds: private real estate lending.
Knowledgeable brokers can help their
clients understand what factors indicate
the top or bottom of the real estate market
and why private-investor lenders may be
their ideal funding source. With this understanding, your property-investor clients
can come out on top when the market hits
the bottom.
Understanding the cycle
The real estate cycle tends to follow the
business cycle, which depends on economic growth.
More jobs means more space — i.e., offices, warehouses, factories, shops, etc. — is
needed for workers. More workers means
more housing is needed. And more housing
means more shopping centers are needed
for new neighborhoods. When there are job
losses and higher unemployment rates, on
the other hand, these things suffer.
Each property type has its green-light
signal for growth. For offices, for example,
that signal is a market vacancy of less than
10 percent. This means that tenants looking for space have fewer options, and the
pricing power returns to the landlords.
Developers thus start building new office
buildings. The early-bird developers fare
“I don’t think we are
at the bottom yet.
There is still time
to play defense.”
well, while developers late to the party
suffer as tenant demand subsides, either
through overbuilding or a turn in the economic cycle.
Top to bottom
Some investors miss the signs that a market is topping off or convince themselves
that it’s different from before. By the time
these investors recognize that they are in
trouble, it may already be too late.
There are several key indicators that
the real estate market is reaching the top.
The first is a shift in the supply-demand
dynamic. Either too much new space is on
the market, causing excess supply, or tenants delay expansion plans or reduce space
leased, resulting in reduced demand.
The pricing power returns then to the
tenants, and landlords suffer. Generally,
when it comes to pricing power, seven out
of 10 years favor the tenant over the landlord anyway. Landlords increase rent concessions first in the denial phase, and they
later drop rents in the capitulation phase.
Another good indicator would be
whether the average person — your barber or hairdresser, for example — is conversant in commercial real estate trends.
When that happens, it is probably time to
get out.
For example, in March 2006, a friend
and I overhead a presentation that one fellow was enthusiastically making to two
others in a restaurant about how easy it
was to flip houses. He said, “You can’t afford not to buy.”
I sized up the speaker as a novice and
told my friend that we had just witnessed
the top of the housing market.
The private world
So just where are we in the cycle? I don’t
think we are at the bottom yet. There is
still time to play defense.
For clients who have equity funds to
invest in commercial real estate, it may be
a good idea to stay on the sidelines for a
while. Good investments are hard to find
and even harder to buy.
But for those of your clients who wish
to buy now, funding options still exist.
Even when most conventional lenders
are limiting the loans they make or pulling out of the market altogether, private-money lenders still are finding success in
this climate.
They make calculated, secured loans
on investment-grade real estate and make
highly predictable, double-digit returns.
Given the focus on safety and valuation,
brokering private loans is not for novices.
All the advantages of a private loan fail if
the broker turns to a lender that does not
understand local-market conditions and the
underlying collateral’s value in a variety of
potential future scenarios.
Kurt Lefteroff is a principal of Secured Private
Capital LLC, a direct-portfolio private lender
located in Scottsdale, Ariz. Reach him at kurt@
securedcap.com or (480) 315-1515. Visit the
company’s Web site at www.securedcap.com.
