Will Commercial Real Estate Investors Shun Main Street Banks For Better Deals?

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A combination of trends working together could potentially see commercial real estate investors shunning main street banks in the second half of 2013 as they seek better resources for deal making.

As several factors become more visible and exaggerated over the next few months commercial real estate investors could quite likely decide to take their business and dollars to alternative resources.

Recently some larger U.S. banks like Wells Fargo have been announcing improved figures, even after suffering a large exodus of deposits at the beginning of 2013. However, much of new revenues and enhanced numbers are being made on the back of higher fees for customers, while pulling back on benefits. In other words consumers are getting less for more, and it doesn’t take a genius to figure out that this approach to customer service isn’t a winner in the long term.

Then if there wasn’t already enough distrust of U.S. banking institutions Bank of America recently revealed that the states and federal government are targeting the mortgage giant with new charges on lending and debt offerings. This follows right on the back of a Goldman’s “Fabulous Fab” being charged over securities moves, yet with no talk of jail time, while consumers are facing upwards of 50 to 90 years in jail for ‘mortgage fraud’ for taking out exotic loans pushed on them by some of the country’s largest banks.

Meanwhile commercial real estate investors continue to get pitched by bank employees with tales of being “relationship banks”, and “valuing relationships”. Which according to a recent report from the CCIM Institute is nothing more than code for “let us hold your money and give you inferior terms”.

At the same time a huge array of alternative commercial lending sources have cropped up or stepped back into the real estate market in the last year with better terms, aggressive underwriting and hungry to loan with more flexibility in structuring.

These lenders know that borrowers are better off staying liquid in order to make payments and maximize working capital, will encourage creative deal making and due to increased competition can often offer better returns.

However, it isn’t just loans, customer service and scandals that are causing more commercial real estate investor to unlike banks. When the bubble burst and the banks held masses of appetizing distressed property deals everyone clamored to befriend them. Now single and multifamily REO inventory held by banks has been dramatically reduced. There are still a significant amount of other commercial and construction REOs and bad loans on their books but many lenders are asking too much for it, and new Fannie Mae rules now demand properties are listed on the MLS in order to even consider a short sale as of August 1st, 2013.

These means many of the most appetizing and profitable commercial real estate deals and small multifamily properties are to be found off market direct from owners. Some are distressed for other reasons or can simply be made more profitable with new strategy or improvements. Others are seeing aging owners looking to cash out while times are good and before rising interest rates hammer cap rates and demand.

In summary investors may want to keep a close eye on any bank stocks they are holding, while turning to alternative lenders for funding and taking a more direct approach for new acquisitions.