Lenders raising the bar for commercial property transactions

Lenders have become more open to financing commercial property development activity, yet are simultaneously imposing higher standards on developers and investors, according to a survey from property group CBRE.

On the one hand, the survey of 20 banks and non-bank institutions found lenders want to do business. “Appetite to lend shows a small improvement compared to last year. This improvement is mainly for investment rather than development loans,” CBRE reported.

On the other hand, lenders have become “more prudent” with loan-to-value ratios; that is, they now expect the average borrower to put down a higher deposit.

Lenders have also imposed tighter conditions on developers, by wanting to see more proof of a project’s viability before agreeing to finance it. “All lenders are now seeking a current and reasonable level of presales as proof of concept and to help reduce concerns around settlement risk,” according to CBRE.

What will this mean for the market?

On balance, the CBRE report suggests we can expect less commercial development activity in the coming years.

The harder it is for developers to secure finance, the fewer offices and warehouses they’ll build. And the harder it is for potential investor buyers to purchase new properties, the less likely developers will be to build them in the first place.

As with any market, a decrease in future supply is likely to mean an increase in future demand (and therefore prices).