Sizing Up The Small-Loan Market

HEADNOTE

There may be a significant untapped market for commercial mortgage lenders in the small-balance real estate loan sector. Here are some facts and figures to help size up the opportunity.

The market for loans

on small commercial properties of less than $5 million is under-reported and poorly understood. The lack of attention flows partially from a paucity of data on this market but, more important, from a lack of understanding about its size; character and impact. * Or put another way, it may be that scant data are tolerated as long as observers assume the small-balance lending space is indeed small or insignificant, and that it mirrors trends in the larger institutional market. * Employing a national database of small commercial property and mortgage transactions provided by the Santa Ana, California-based First American Corporation, Boxwood Means Inc., Stamford, Connecticut, demonstrates these assumptions to be untrue. With $64 billion in originations in the first half of 2005, following $127 billion in the previous full year, the small-loan market is anything but small. * If you're still not convinced, consider this: The 2004 small-balance origination total exceeded the total issuance of domestic commercial mortgage-backed securities (CMBS) in the same period. * As we lift the veil on this marketplace, we also see evidence that the small market differs substantially from the institutional market in degrees of leverage, loan terms and investment trends. Borrowers and owners appear to be chiefly buyand-hold investors, which may account for the relatively stable, bubble-less flows of capital into this space. Moreover, despite its size and unique characteristics (or perhaps because of them), the small commercial loan market is extremely fragmented. Even the largest players maintain a trivial market share.