Unique Times in Commercial Lending
KC's Commercial Lending Forecast

The first signs of an economic upswing will surface as the war with Iraq progresses. Upon a U.S. victory, fuel for the country's economy is on its way. This will most assuredly spell a hike in interest rates.

This raises the question as to where the investment money is to come from. As it stands right now, there is a tremendous amount of money available to invest in mortgages. The biggest providers are conduits--that is, securitized lenders. These include private insurance agencies and government generated entities the Fanny Maes and Freddie Macs.

Indeed, there is an all but unlimited amount of capital now available in the Kansas City market, but it is none-theless difficult to get a "full loan." The underwriting of loans has grown more conservative as vacancies increase. It is difficult to obtain a "full" loan on office properties today with vacancy projections at higher levels and tenant improvement and lease commissions analyzed more carefully.

Nor is there enough home grown equity available in the city. What is more, the Kansas City area is not a marketplace that institutional investors have looked hard at in that we do not have quite the growth or return as many other cities yeild. Down the road we will need to do everything we can to keep development within our own boundaries, and this will require the development community to be prepared for an increased amount of equity to go into a project.

Despite lower occupancies--vacancies are a big concern on a national level, and on a local scale--lenders have increased their appetites for investment. For all the problems in the building industry, the fact remains that there are no yields anywhere close to real estate, certainly not on Wall Street, not recently anyhow.

The vacancy issue, however, continues to be a thorn in the side of underwriters. In that Kansas City has never been either a boom or a bust town--over the years our city has prided itself on its constancy--business leaders have remained conservative with construction.

Historically, this balance has kept our market fairly consistent. Despite the current vacancy situation, Kansas City has not 'overbuilt' its new office buildings, new industrial buildings, or large, unoccupied shopping centers. The continued softness in our apartment market suggests that this may have been the one sector subject to overbuilding.

Borrowers have proven receptive to these downscaled loan packages, as the market holds competitive with more buyers than sellers. And one can't expect the vacancy rates to plummet as soon as the economy looks up. A prolonged period of lower occupancies is in the forecast over the next 12 to 18 months.

The excess of vacancies has caused capitalization rates to decrease as well. Buyers have been willing to take a lower return on investments as they seemingly can't get returns anywhere else. Yet, as this silver-edged cloud of economic prosperity floats closer, this trend will reverse.

Simply put, as the news of U.S. military success abroad filters in, a homeland scramble should begin. On the commercial lending side, many people who have been borrowing at lower rates are now aggressively seeking long-term financing.