A New Indicator of the Health of Real Estate Investing

US government data indicates that commercial real estate lending is healthier than it has been for many years.

With Q2 ’15 data analysis now available, the Federal Reserve notes that commercial real estate loan delinquency rates have been in steady decline, implying a healthier economy and real estate market.  The percent of CRE loans from banks with delinquent payments dropped to 1.2%, the lowest rate since 2006. In between these years, the delinquency rate climbed as high as 8.77%, during the major recession. There’s a great chart here, with a screen capture below.

iFunding sees this as another sign that commercial real estate investing may be in a ‘goldilocks’ environment now, where market demand and property prices are growing slowly but steadily and investment performance overall should bias positively.  Although there are no guarantees about the future, many industry pundits agree the U.S. domestic economy is relatively robust (see the video here), the existence of an investment bubble is very unlikely, and the possibility of a recession is low for the next several years.
What does the Fed’s loan data mean for your real estate investing? You may want to consider that:
  • Investment opportunities with a 1- to 3-year target for return of capital are attractive yet prudent, as they are predicted to avoid major macro-economic surprises.  Longer duration investments also can be favorable, but understand that your capital may be locked in for an unexpected amount of time until the market is right for a property sale.
  • Both first-lien debt and well-underwritten mezzanine (“second tier”) debt, with its higher average return rate of several percentage points, can be reasonable investments for an income-generating portfolio at this time. First-position debt is secured by a first-in-line lien against the property, meaning that even if there are payment delays or defaults, a company like iFunding is in position to take control the property and protect investors’ principal.
  • The average loan default rate will vary by the type of commercial property held, the structure of the loans, as well as local and demographic economic trends, and each property carries its own risks. Therefore, spread your investments across multiple holdings to diversify away much of the default risk.