Sizing up the small-loan market: there may be a significant untapped market for commercial mortgage lenders in the small-balance real estate loan sector. Here are some facts and figures to help size up the opportunity.

Author:Fuchs, Randy
Position:Commercial/multifamily - Statistical table

The market for loans on small commercial properties of less than $5 million is under-reported and poorly understood. The lack of attention flows partially from a paucity of data on this market but, more important, from a lack of understanding about its size, character and impact. [??] Or put another way, it may be that scant data are tolerated as long as observers assume the small-balance lending space is indeed small or insignificant, and that it mirrors trends in the larger institutional market. [??] Employing a national database of small commercial property and mortgage transactions provided by the Santa Ana, California-based First American Corporation, Boxwood Means Inc., Stamford, Connecticut, demonstrates these assumptions to be untrue. With $64 billion in originations in the first half of 2005, following $127 billion in the previous full year, the small-loan market is anything but small. [??] If you're still not convinced, consider this: The 2004 small-balance origination total exceeded the total issuance of domestic commercial mortgage-backed securities (CMBS) in the same period. [??] As we lift the veil on this marketplace, we also see evidence that the small market differs substantially from the institutional market in degrees of leverage, loan terms and investment trends. Borrowers and owners appear to be chiefly buy-and-hold investors, which may account for the relatively stable, bubble-less flows of capital into this space. Moreover, despite its size and unique characteristics (or perhaps because of them), the small commercial loan market is extremely fragmented. Even the largest players maintain a trivial market share.

This conclusion has implications not only for lenders that could better exploit the new intelligence on this market, but also for small-property investors and small-business owners. The fact is the small-loan market caters particularly to small businesses, classically understood to be a major growth engine for the economy and job creation. As a result, fostering better market information about this sector could produce extensive private, as well as public, benefits.


Data availability

Boxwood Means maintains a substantial database on small properties nationwide on behalf of its joint-venture partner, First American Commercial Real Estate Services Inc., Dallas, a division of the First American Corporation. This database, encompassing more than 3 million commercial properties of less than $5 million in value, archives all U.S. property sales and mortgage transactions as recorded in county tax assessor offices nationwide. Boxwood also maintains a similar database of transactions on larger properties.

The First American-Boxwood database reflects an ongoing effort to quantify the size and activity levels of this small-property market principally for the benefit of lenders. Therefore, though we catalog property sales and loan transactions for more than 200 property categories, we focus on the major property types that are typically financed by commercial real estate lenders and small-business bankers.

Many of these small-balance loans are secured by owner-occupied properties, single-tenant facilities or buildings run by individuals as a single investment. The building types include office, industrial, retail and multifamily, plus a generic commercial land-use type. The commercial category, which includes hotels, motels, medical buildings and public storage facilities, is also the designated classification for more conventional office, retail or industrial properties in a minority of U.S. counties and states. The dominance of the...

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