Monday, October 02, 2006

Lender remain hungry for commercial building projects

by Brad Carlson @ Idaho Business Review

Interest rates moved up and down this year, but lenders’ appetites for new commercial real estate projects stayed steady in the Treasure Valley.
Developers typically take out long-term financing to replace a short-term construction loan after signing income-producing occupants.

Moves by the Federal Reserve Board to raise short-term interest rates at 17 consecutive meetings – during a two-year period through June – affected construction loan rates more than rates on long-term loans, said Jim Klumpp, partner in Boise commercial mortgage brokerage Harty Capital Corp.

Interest rates on long-term loans are primarily tied to the bond market’s perception of inflation and economic growth, he said.

Yields on 10-year U.S. Treasury bonds rose from around 4.4 percent at the start of the year to 5.24 percent in late June, according to Yahoo Finance. The yield was 4.6 percent last week.

Klumpp said long-term lenders got more active as Treasury interest rates fell recently, but that lending activity never really slowed this year.

“Overall I think their underwriting is becoming more rigorous on general concerns of overall economic health,” he said. “But they remain really active.”

Recent declines in Treasury yields sparked additional financing activity by long-term lenders and brought 2006 volume to a level that’s pretty consistent with last year, Klumpp said.

“The lenders are active. There are ample funds out there of long-term financing,” he said. “That part is working well.”

Brokers at Harty Capital remain busy.

“With Boise being a strong growth market population-wise and job-wise, there is a lot of interest from long-term lenders in the market,” Klumpp said. “So we have been doing all product types.”

“The challenge with commercial is to make it economically feasible,” said Rob Perez, senior vice president with U.S. Bank in Boise.

Rents haven’t kept pace with rapid increases in land and construction costs, he said.

Nevertheless, long-term lenders’ demand remains strong, Perez said.

“Long-term lenders have reduced spreads and offset some of the rate increases early in the year,” he said. “They reduced spreads because of demand for product.”

Banner Bank Vice President and Commercial Banking Officer Margaret Sato said some residential builders are feeling the impact of higher interest rates on construction loans.

Construction loan interest rates are tied to the Prime Lending Rate that banks charge their best customers, or the London Interbank Offered Rate, she said.

Prime has stayed at 8.25 percent since June, after steadily increasing two years earlier from 4.25 percent.

“It can be pretty significant, and if they are sitting on inventory, it gets pretty painful,” Sato said.

She does some commercial construction lending as well. “That certainly has not dried up,” she said.

“We’re very aggressive, very optimistic,” said Winston Moore, principal in Meridian-based developer W.H. Moore Co. “You still have to have the right location and the right product. You have to build what people want, and, of course, you have to be able to compete.”

Retail is the strongest segment, and office leasing is softer, he said.

On the industrial side, average vacancy dropped in the past year as two big buildings attracted buyer-occupants and high land prices encouraged some developers to postpone projects, Colliers International real estate broker Steve Foster said at a recent conference.

General Growth Properties Inc., the publicly traded company that owns the Boise Towne Square mall, reported that its real estate property net operating income for the second quarter rose by 6.3 percent from a year earlier.

Washington Trust Bank’s construction-loan production is up a bit from 2005, says Dean Oberst, southern Idaho and Utah senior vice president for income properties and builder services.

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