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The new economics of CRE―financing options

Jan 19, 2017

Many metrics across the commercial real estate market are showing strong growth right now, particularly absorption rates, vacancies, construction pipeline and cap rate compression.

Most striking, though, are numbers on property pricing and deal flow. According to the research department at Ten-Xa platform that connects buyers and sellers worldwide, allowing them to search, list and transact properties online―the demand for commercial property continues to grow. The most recent report shows that quarterly volume has topped the $100 billion mark for eight straight quarters, with the most recent second quarter tally reaching $101.2 billion.

Further, property pricing is up 8.4% year-over-year as of June, as indicated by the Moody’s/RCA Commercial Property Price Index (CPPI), while the Ten-X proprietary Nowcast advanced on a year-over-year basis by 5.2%.

Financing

Behind these statistics is an incredibly vibrant lending market―the dollars that drive the offers and closings in the marketplace. Technology has been transforming the CRE sector as a whole in recent years, and finance is no exception.

The traditional financing vehicle is bank debt issuance: a Ten-X report indicates that “as of the first quarter, banks and thrifts accounted for 38.6% of total commercial and multifamily mortgage debt outstanding, and this debt has skyrocketed 38% since its most recent low in mid-2011.”

However, loan volume is not the only story. According to the same Ten-X report, there is a fast-growing component of outstanding CRE debt gaining traction. “We are experiencing significant changes in how CRE lending occurs,“ says Peter Muoio, Chief Economist at Ten-X. “The landscape, while still dominated by the banking sector, is moving into other institutional and investment categories.”

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Ten-X Research

Crowdfunding one example under “Other”

Both in delivery mechanism and source, the category of “Other” represents 13.3% of debt outstanding with innovation and technology as drivers of a variety of offerings.

Take the nascent crowdfunding industry, which in 2015 accounted for capital raise of $34 billion with forecasted growth of $300 billion by 2025, according to alternative investment group CFX. The CRE sector in 2015 represented only $2.5 billion, with a conservative estimate of $3.5 billion in 2016, according to CrowdFundBeat.

As technology, information exchange and transparency progress, crowdfunding opportunities will continue to broaden the scale and scope of commercial real estate deals. According to Bloomberg, there are some 125 CRE crowdfunding platforms in the U.S. alone, which raised $484 million in 2015.

A few options to explore

Ten-X also offers a platform that provides buyers with financing options optimally suited to certain properties. Through dedicated capital partnerships including Blackstone, Prologis, Oaktree, Starwood Property Trust and others, buyers and investors can tap into their ideal structure as multiple vendors vie and bid for the client’s business. Through this arrangement, all parties can be confident that the transaction will close smoothly and in a timely fashion because the financing arrangements are in place.

And that’s just one option. Consider a recent article in the Commercial Observer, which discusses a financing conduit that provides lenders and investors with online loan syndication capacity. Under this arrangement, a borrower receives their financing under a traditional bank note. However, behind the scenes, participation agreements between junior and institutional investors provide funding above and beyond what the primary lender is able to offer. The frameworka collaboration between Aristone Capital, Propellr LLC, Centennial Property Finance and Joshua Stein PLLCis altering standard loan dynamics while providing new investor opportunities.

Whether the disruption is in mortgage technology, peer-to-peer commercial lending, the democratization of CRE investors, or the buyer/seller connectivity marketplace, the industry has been changing dramatically in the past few years. And as technology and innovation launch new entrants and offerings into the sphere, the economics of CRE will continue to evolve.

Tim Randall

Written by Tim Randall

Tim Randall has been in Communications, Public Relations and Content Development for over five years. Core competencies include: media relations, content creation, branding, B2B, and stakeholder engagement. Industry experience encompasses: commercial real estate, healthcare, finance, food and restaurant, IT, technology services, and more. Tim has written hundreds of commentaries, whitepapers, media alerts, press releases, internal communiques and other content deliverables. He contributed to such leading sites as Commercial Executive, Arizona Executive Magazine, and Ten-X.

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