It's Good Money, If You Can Get It

July 9, 2008
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GRAND RAPIDS — When it comes to residential real estate, much attention is given to the sub-prime “implosion” of the industry. Commercial real estate, however, has been a bit steadier.

The two industries draw a parallel with lending.

“There are correlations, but they’re not one to one,” said Chris Beckering, real estate advisor with the office services group at Grubb & Ellis|Paramount.

“The biggest problem we’ve had in the commercial markets as it relates to the sub-prime implosion that we’ve seen is the availability of credit. Banks are willing to lend money at very aggressive rates; however, it seems to be increasingly difficult to get loans approved.”

Beckering said some of the changes he has noted are higher equity requirements, more stringent reviews of appraisals and property valuations, and the requirement of higher debt coverage ratios. The type of buyer typically determines which financing source that person or company will go to.

“There are several sources of financing. There are local banks, there are regional and national banks, and then there are conduit-type lending sources and commercial mortgage back security sources,” said Beckering.

“If you’re an owner-user, someone who is going to buy and occupy space themselves, they’re typically borrowing money from local or regional banks, and the problem, I think, with some local banks is the availability of capital as a result of the sub-prime implosion and some of the bad debt.

“With regional banks, I think what we’re seeing are banks recognizing that there are often better opportunities in other parts of the country, and they’re focusing their capital in those areas.”

Jim Bishop, senior vice president of The Bank of Holland, believes another problem in the commercial real estate industry is underwriting.

“The industry has definitely turned, meaning that we noticed in the last two years that the industry has gotten away from proven underwriting in favor of growth,” said Bishop.

“We’ve stayed disciplined about it, so we’re not feeling the impacts as much as other banks in the area may, but my staff and I continue to put the underwriting sense to any particular deal that we look at — just as we always have — and provide the customers with that information.

“We do look at what the lease rates are on the property and if it makes sense. And if a particular building has warehouse space leased up and is $10 a foot, and we know that the market’s probably down at ($4), then that tells us there’s a potential for that tenant to go away and find cheaper space, so we look at the common sense approach, as well.”

Beckering realized a similar theme.

“Any time a new tenant comes in and gets a better rate than an existing tenant, there’s always rumblings of the existing tenant saying, “Why are we paying above market?”’ said Beckering. “When a market declines or when a tenant’s rent escalates over time … they will go to the landlord and ask for concessions. Contractually at that point, the tenants are typically bound to their lease obligations. However, when they come up for lease expiration or lease renewal, they are going to be trying to renegotiate with the landlord if they are paying above-market rates.”

Beckering pointed to the other side of the coin, where, in an up-market, if a tenant is locked into a below-market lease rate, the landlord doesn’t go to the tenant and ask them to pay more.

“A reasonable landlord is going to look at a situation and say, ‘What are my goals and objectives with the building? What’s my relationship with the tenant? What can I do to help them succeed and grow and become a long-term viable tenant?’” he said.

“If a tenant is struggling and they need a discounted rent in order to get by, and they’re willing to make up for that discount with an escalation maybe down the road, a landlord may take a look at that and say, ‘Maybe I can give you a break now to help you get through a rough time, provided you’re going to extend your lease commitment.’”

Although the real estate market has taken some lumps in the down economy, commercial real estate has held pretty steady — especially in Grand Rapids.

“I think Grand Rapids is the city on a hill for the state of Michigan. … Particularly in the downtown Grand Rapids area, things are going quite well,” said Beckering. “We have incredible philanthropic support. That philanthropic support is not just people giving money, it’s people giving money strategically. And not just giving money, but their time and their talents, as well.

“I think we have creative and visionary developers that are committed to the West Michigan community, and I think there is a work ethic and an entrepreneurial spirit in West Michigan that has allowed us to reinvent ourselves as the automotive market has struggled.”

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