Trends in Commercial Real Estate Lending

Q4 Commercial Real Estate’s Craig Byers sits down with Brad Joens, Senior Vice President, Commercial Banking at Hills Bank, where Brad provides some insight into commercial real estate lending trends.

(Craig) Good morning everyone this is Craig Byers from Q4 Real Estate and I am sitting here today with Brad Joens, Senior Vice President of Commercial Lending at Hills Bank and Trust. (Craig) How you doing today Brad? (Brad) Good. Thank you for getting that Senior in there. (Craig) Of course.

(Craig) So we asked Brad to come and sit down with us today to discuss where commercial lending is going in these uncertain times with what the Federal Reserve is doing with interest rates. (Craig) So Brad we are just going to shoot back and forth a couple of different questions. Just tell me what comes to top of mind.

(Craig) So first question that I think everybody wants to know is your prediction of looking into your crystal ball as to where you see interest rates and what you see them doing over the next six to 12 months. (Brad) Yes definitely the number one question we are getting in commercial real estate right now. If you would have gone into the 2022 interest rates, prime was at 3.25, we are at 7.00 now after the latest increase on Wednesday. I would have never predicted that at the beginning of the year. (Brad) Obviously we knew interest rates were going to increase but to see the amount of increase the FED has done has been a little surprising. So looking forward of course, we don’t have all the answers, as you mentioned looking into the crystal ball. I think the general consensus is there will probably be another rate increase again in December. (Brad) But as we look into 2023, I think a lot of the projections are you will see it kind of cool. Obviously they are trying to temper inflation. That is what they are trying to do which is a huge topic for the economy right now. So a lot of it will depend on jobs, chain supply and so, I do think a lot of people who are predicting have a lot more knowledge than I would, are predicting a little bit of slow down on rates.

(Craig) Being that you are providing many loans to many different facets of commercial real estate developers and investment, how have you seen these higher interest rates? Are they negatively effecting commercial real estate values and property values? How do you see your users and clients navigating these higher interest rates? (Brad) Yeah so I mean obviously with the developers we are working with, a lot of projects they have been working on for a year or two right. They are getting Brownfield and Grayfield tax incentives. So a lot of these things have been in motion for a while. We are seeing a lot of growth. If you drive down I-380, tons of growth, tons of things happening. Really what we are seeing a lot of the homebuilders, they are typically building in that $500K -$600K range. Who is their end user? Who is their buyer? Higher interest rates obviously your fixed costs climb drastically. (Brad) Their buyers with the interest rates are thinking maybe I should build a $300K-$400K house. That’s kind of on the homebuilder’s side. The developers, the construction, multi-family. Maybe you are not building as large of a project as you would have. Maybe your finishes are a little bit different. That’s where you get a good general contractor, somebody you have a good relationship with and you talk to them. What makes sense for the market today?

(Craig) A final question, with all of your clients, if I am coming in and looking for a loan from Hills Bank whether I’m a home buyer or I’m someone investing in commercial real estate, what advice do you have for me to try to obtain the most favorable interest rate? (Brad) When you look at the fundamentals of commercial lending or home lending, buying your own personal home, on the commercial side we are looking at primary repayments, what is the cash flow? Cash flow is huge. The second thing is down payment. We are starting to see a little bit more of that. Generally speaking, commercial real estate and multi-family is 20% down. But some people are saying hey I am going to put a little bit more down. You see that from time to time. So obviously the lower the loan balance the less accrued interest throughout the life of the loan. (Brad) So that’s some of the things that we are talking to our borrowers about. Down payments and cash flow. There are solid investment properties out there. There are solid leases in place. So there is deals out there. We have good clients at the bank that we work day in and day out with and so its just having those conversations about the cash flow, down payment, the collateral, and whose behind the deals.

(Craig) Well if I am needing financing how do I get a hold of you Brad? (Brad) You can find me on a lot of social sites such as LinkedIn and on the Hills Bank website. I’m easy to find.

(Craig) Well I appreciate you taking the time to speak to me today. Everyone out there have a great day and if you have any questions you can always reach me at 319-294-3339. Thank you!

You can watch the informational video, Commercial Lending Forecast Featuring Brad Joens from Hills Bank below.

Try out our commercial lease calculator here.

For more helpful information check out our blog posts titled: Commercial Real Estate Tenant Improvement Allowance.

Let one of our knowledgeable listing agents partner with you to find a commercial real estate property perfect for your business needs, and assist you in working through the lease process. Contact Jason Rogers or Craig Byers, at 319-294-3339 today!