2016 Commercial Lending Trends Survey

National Association of REALTORS
COMMERCIAL REAL ESTATE

LENDING TRENDS 2016
Commercial Real Estate Lending Trends 2016

2016 | NATIONAL ASSOCIATION OF REALTORS
All Rights Reserved.
Reproduction, reprinting or retransmission in any form is prohibited without written permission.
COMMERCIAL REAL ESTATE LENDING TRENDS 2016
NATIONAL ASSOCIATION OF REALTORS

2016 OFFICERS
President
Tom Salomone
President-Elect
Bill Brown
First Vice President
Elizabeth Mendenhall, GRI, ABR, ABRM,
CIPS, CRB, PMN
Treasurer
Michael McGrew, CRB, CRS
Immediate Past-President
Chris Polychron, CIPS, CRS, GRI
Vice President
Michael Labout, GRI
Vice President
Sherri Meadows, GRI, CIPS, CRB, PMN
Chief Executive Officer
Dale Stinton, CAE, CPA, CMA, RCE
NATIONAL ASSOCIATION of REALTORS
CONTENTS
1 | Introduction
2 | Economic Overview..
3 | Commercial Real Estate.
13
4 | Survey Highlights...
19
5 | Survey Results:
21
Market Environment..
22
Lending Environment.
24
Appraisals..
27
Methodology
29
INTRODUCTION
INTRODUCTION
GEORGE RATIU
Director, Quantitative &
Commercial Research
gratiu@realtors.org
Commercial real estate (CRE) notched another year of growth in 2015, favored by
continued macroeconomic growth and broadening capital markets, according to the
Expectations & Market Realities in Real Estate 2016: Navigating through the
Crosscurrents report, released by Deloitte, the National Association of REALTORS,
and Situs RERC. While global economies decelerated, leading to volatility in financial
indices, U.S. gross domestic product rose, employment growth accelerated toward
the tail end of the year, and housing prices reached new heights. In addition, the
Federal Reserve signaled a shift in its monetary policy by raising its target funds rate,
as core inflation hovered around its target of 2.0 percent.
Commercial vacancy rates declined for the core property types. Availability is
expected to continue contracting for office, industrial and retail properties in 2016.
Vacancies for apartments are estimated to rise, due to gains in supply. Commercial
rents have risen across the board, and are projected to advance this year in the 2.5
percent to 4.0 percent range.
CRE sales volume continued its positive trend in 2015, with $534 billion in closed
transactions, compared with $432 billion in 2014, based on data from Real Capital
Analytics (RCA). Most of the transactions reported by RCA are based on data
aggregated at the top end of the marketabove $2.5 million.
In contrast to the large commercial transactions reported by RCA, commercial
REALTORS managed transactions averaging $1.8 million per deal, frequently
located in secondary and tertiary markets, and focused on small businesses and
entrepreneurs. The 2016 Commercial Real Estate Lending Trends shines the
spotlight on this significant segment of the economya segment which tends to be
somewhat obscured by reports on Class A trophy commercial properties.
Lending conditions in REALTOR markets notched another year of sustainable

recovery. As CRE asset prices strengthened, financing and lending conditions
improved in 2015. The main sources of capital for commercial REALTORS clients
remained local and regional banks, which made up 55.7 percent of funding in 2015.
The incidence of failed transactions, due to lack of financing, reached a new low.
REALTORS cite uncertainty from legislative and regulatory initiatives as the most
relevant cause of bank capital shortage for CRE.
ECONOMIC OVERVIEW
ECONOMIC OVERVIEW
Gross Domestic Product
Looking at macroeconomic performance through
the lens of the Gross Domestic Product (GDP), U.S.
economic activity grew at a moderately positive 2.4
percent in 2015, on par with the prior year. This
marks the seventh year of post-recession economic
growth. However, with the fourth quarters growth
notching a mere 1.4 percent gain, it also marks
another year of subpar performance, considering
that long-term GDP growth has averaged 3.0
percent. Nonetheless, in the context of the global
economic landscapeespecially as illustrated by
recent market gyrationsthe U.S. economy
continued to be a comparatively bright spot.
Gross domestic product had a slow start in the first
quarter of 2015, with a slight 0.6 percent increase.
Economic activity picked up in the second quarter,
as GDP rose at an annual rate of 3.9 percent.
However, financial markets gyrationspredicated
on the global slowdownled to lost momentum
and the third quarter posted an increase of 2.0
percent.
investments typically make up 13 15 percent of

GDP. Spending by companies had a moderate start
in 2015, but was followed by a solid 4.1 percent
increase in the second quarter. The third quarter
recorded slower growth, while the final quarter of
2015 witnessed a 1.9 percent decline in
nonresidential fixed investments. Toward the tailend of the year companies cut back on commercial
construction and equipment spending. Double-digit
cuts in purchases of transportation and other
equipment led to declines in overall equipment
investment. Spending on industrial and information
processing equipment remained bright spots.
Companies also slowed their investments in
intellectual property productssoftware, R&D,
along with entertainment, literary and artistic
works.
Exhibit 2.2: Real GDP Business Investments
(% Annual Chg.)
Structures
Equipment
Intellectual Property
20
10
Exhibit 2.1: Real GDP (% Annual Chg.)
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
-10
2002
2001
-20
2
-30
1
2016
2017
-1
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-2
-3
-4
Source: NAR, BEA
The changes in GDP through the year were mirrored

in the pattern of business investments, which felt
the impact of volatility in financial markets. Business
Source: BEA
International trade continued to play an increasing

role in the U.S. economy. While the Great Recession
clearly impacted the pace of trade, the subsequent
rebound had been positive, aided for a while by a
soft U.S. dollar, which drove marked growth in U.S.
exports and a contraction in the balance of trade.
However, in 2015, international trade felt the
impact of the stronger dollar, which reached its
highest point since 2004. U.S. exports rose at a
modest 1.1 percent in 2015, while imports
advanced 4.9 percent, keeping the balance of trade
at a negative $544 billion for the year. The

slowdown in exports notwithstanding, international
trade proved positive for the industrial real estate
sector, driving demand for space and leading to
strong investor interest.
employment and higher household wealth

encouraged consumers to spend more on
household appliances, furnishings, clothing, but also
more discretionary items like recreation and
recreation vehicles.
Exhibit 2.3: Real Net Exports (Bil Chn

2009$)
Exhibit 2.4: Real Consumer Spending (Bil

Chn 2009$)
2015
2014
2013
2012
2011
2010
-200
-300
Consumer Spending
15000
10000
-400
-500
5000
-600
-700
Source: BEA
2015
Source: BEA
Government spending, another major GDP

component, saw a modest 0.7 percent annual gain
during 2015. Most of the gain came from higher
spending by state and local governments, which
have enjoyed rising property tax revenues. The
federal government cut its spending by 0.3 percent
during the year, as defense spending retrenched.
Consumers continued as the main engine of
economic activity in 2015, with consumer spending
comprising 68.0 percent of total GDP. Consumer
expenditures rose during each quarter of 2015,
rising from an annual rate of 1.8 percent in the first
quarter to 3.6 percent and 3.0 percent in the second
and third quarters. However, the fourth quarter
which includes the traditional holiday shopping
seasonrecorded a slower 2.5 percent advance. On
balance, consumers spent more on a broader array
of goods and services in 2015. Buoyed by declining
gasoline priceswhich dipped to $53 per barrel by
Decemberconsumers purchased more cars. Auto
sales reached an annual level of 17 million vehicles
by the end of the year. In addition, rising
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2001
2003
-800
-900
GDP
2002
2009
2008
2007
2006
2005
2004
2003
2002
-100
20000
2001

Housing
Exhibit 2.6: Completions & Household
Formation
New Housing Completions ('000s)
2500
Household Formation ('000s)
2000
1500
1000
500
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
-500
2001
0
2000
The housing recovery led the way during 2015. With

the annual pace of existing home sales above 5.0
million, housing supply shrank and hovered below
its long-term equilibrium of 6 7 months. At the
end of December 2015 there were 1.8 million
homes available for sale, down 5.4 percent from
already low levels in the prior year. Given the
higher-than-usual sales pace in December, owing to
the unseasonably warm weather, the measure of
months supply fell to 3.9 months, one of the
thinnest levels of inventory recorded in the past 15
years.
Source: Census Bureau
Aside from an increase in sales, the steady drop in

distressed properties over the past seven years
coupled with underproduction of new homes has
exacerbated the inventory situation. Distressed
properties accounted for only 6.0 percent of total
sales at the tail end of 2015, down from over 40.0
percent in 2008-09.
12
Over the same 2009-15 period, Americas

population rose by over 17 million. Even accounting
for an average of 2.5 persons living in one housing
unit, about 7 million new homes would have been
required to meet demand.
In addition, the historical household formation
numbers corroborate the gap in the market. Over
the long-term, the U.S. economy has recorded an
average of 1.5 million new households per year. The
number dropped significantly during the Great
Recession, but it has been moving toward its longterm trend.
Exhibit 2.5: NAR Months' Supply of Existing

Homes
10
8
6
4
2
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Source: NAR
The supply of new homes has averaged about

800,000 units per year since 2008. In fact, from
2009 to 2015, a total of 5.6 million single-family
homes, condominiums, and apartment units were
built. Over the same period, approximately 1.7
million housing units were demolished and removed
from the housing stock, as they were uninhabitable
or obsolete. For the period, there were a net 3.9
million housing units added to the countrys stock.
In turn, home prices have been rising at a healthy

clip over the past few years. The price appreciation
has been a boon for homeowners, boosting their
wealth. In fact, household wealth tied to real estate
reached $22.0 trillion in the fourth quarter of 2015,
with owners equity totaling $12.5 trillion, closing in
on the prior peak achieved in the early 2006.
However, this has broadened the divide between
homeowners and renters. For consumers who
participate in real estate markets, the recovery has
been positive, leading to an improved outlook. For
consumers who are not participating in the markets,
income is the main measure of economic wellbeing, and wages have been rising only about 2.0
percent on a yearly basis.
10

Employment
Payroll employment closed the year on a positive
note, with almost 3.0 million net new jobs. Payroll
employment rose at the strongest pace in the last
quarter of the year, adding 837,000 new jobs. The
sectors with the largest gains were in the Education
& Health, Professional & Business Services, and
Leisure & Hospitality industries. With employers in
these sectors growing, demand for commercial
properties has been on the upswing, leading to
lower vacancies and improved cash flows. The
unemployment rate declined from 5.6 percent in
the first quarter 2015 to 5.0 percent by the close of
the year. The average duration of unemployment
declined from 31 weeks in the first quarter to 28
weeks by the end of 2015.
As of the end of 2015, 94.1 million Americans 16

years and older were not in the labor force, of which
1.8 million were estimated to want a job; this is in
addition to the 7.9 million Americans currently in
the labor force but unemployed. Even as the U.S.
population continues to grow and the Millennials
become the largest demographic cohort, retiring
Baby Boomers, and a low or contracting
participation rate will likely hold back economic
potential.
Exhibit 2.8: Labor Force Participation Rate
68
67
66
Exhibit 2.7: Payroll Employment (Change,

'000)
65
64
400
63
200
-400
2007 - Jan
2007 - Aug
2008 - Mar
2008 - Oct
2009 - May
2009 - Dec
2010 - Jul
2011 - Feb
2011 - Sep
2012 - Apr
2012 - Nov
2013 - Jun
2014 - Jan
2014 - Aug
2015 - Mar
2015 - Oct
-200
2001 - Jan
2001 - Nov
2002 - Sep
2003 - Jul
2004 - May
2005 - Mar
2006 - Jan
2006 - Nov
2007 - Sep
2008 - Jul
2009 - May
2010 - Mar
2011 - Jan
2011 - Nov
2012 - Sep
2013 - Jul
2014 - May
2015 - Mar
2016 - Jan
62
0
Source: BLS
-600
-800
-1000
Source: BLS
However, it is worth pointing out that there is a

cloud casting a long shadow over the employment
landscape. The labor force participation rate rose
from 58.0 percent in the late 1940s to over 67
percent by the early 2000s, as women entered the
labor force in large numbers. The figure has been
declining over the past 15 years, but the decline
accelerated during the Great Recession, and
reached 62.6 percent in December of 2015, the
same level as seen in the late 1970s.
11

Monetary Policy
Markets spent the better part of last year trying to
read the Federal Reserves decision on the funds
target rate. During the summer, the concern focused
on the September meeting of the Federal Open
Market Committee meeting, which did not result in
a rate hike. Mid-December brought a muchanticipated change, ending the Feds
accommodative policy with a 25 basis point hike. Of
course, since then, financial markets have been
riding a wild roller coaster, leading some to question
the timing of the Feds decision.
Exhibit 2.9: FOMC Fed Funds Target Rate
(%)
7
6
5
4
3
2
1
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
Source: Federal Reserve Board
Longer-dated bond yields had not moved up

measurably despite the Federal Reserve rate hike.
For commercial real estate investors the spread
between the 10-year Treasury Note yields and cap
rates remained at over 400 basis points. However,
with interest rates expected to rise, commercial
price appreciation is expected to moderate.
Despite earlier concerns about the potential for
inflation, 2015 recorded low inflationary pressure
due in large part to declines in prices of gasoline
and other energy products. Deflationary pressures
are expected to subside in 2016, as gasoline prices
will likely stabilize.
In addition, with apartment rents having risen at 4.0

percent or better over the past few years, and the
Owners Equivalent Rent component of the

Consumer Price Index having increased at over 3.0
percent in 2015, consumer prices are projected to
notch up in the short to medium term
Outlook
The outlook for the remainder of 2016 remains
moderately positive, with GDP projected to close
the year 1.5 percent higher on an annual rate.
Payroll employment is expected to advance at an
annual rate of 1.3 percent. With the Federal Reserve
expected to continue increasing the funds target
rate, U.S. inflation is expected to remain below 2.0
percent in 2016.
Household formationan important driver of
economic growthhas been rebounding toward its
long-term trend. While in 2015 household
formation advanced at a rather moderate pace of
191,000 new households, we expect it to continue
advancing over the next few years as Millennials
currently considered the largest generational
segment of the U.S. populationmature and enter
the workforce in larger numbers.
Exhibit 2.10: U.S. Economic OutlookMarch 2016
2014
2015
2016
2017
2.4
2.4
1.6
2.7
1.9
1.6
2.1
0.2
1.4
1.8
1.9
3.2
Level
Consumer Confidence
87
98
95
100
Percent
Unemployment
Fed Funds Rate
3-Month T-bill Rate
Corporate Aaa Bond Yield
10-Year Govt Bond
30-Year Govt Bond
6.2
0.1
0.1
4.2
2.5
3.3
5.3
0.1
0.1
3.9
2.1
2.8
4.8
0.8
0.6
4.2
2.1
3.1
4.7
1.7
1.6
4.8
2.8
3.8
Annual Growth Rate, %

Real GDP
Nonfarm Payroll
Employment
Consumer Prices
Source: National Association of REALTORS
12
13

Fundamentals
Commercial real estate continued on an upward
trajectory in 2015, building on improving
fundamentals and investment momentum. In
tandem with rising economic conditions, leasing
strengthened during the year. Growing net
absorption led to declining vacancies and
accelerating rent growth. As employment gains are
expected to continue into 2016, demand for
commercial space is expected to advance.
Professional and business services added the
highest number of net new jobs in 2015. The
improving employment landscape in office-using
industries drove demand for office space. Almost
half of office leasing activity during the year was
made up of company expansions, a positive
development. Even with 44.2 million square feet of
new supply, office vacancy declined 40 basis points
year-over-year, to the lowest level in eight years
14.7 percent by the fourth quarter. Rents for office
properties rose 2.2 percent during the fourth
quarter, to $31.26 per square foot, according to JLL.
Retail net absorption totaled 88.3 million square

feet in 2015, according to JLL. Constrained new
supply in high-demand areas lowered vacancies to
5.7 percent by the last quarter of the year. Rents
increased 2.1 percent during the year, to an average
$15.84 per square foot.
Demand for multifamily properties continued on an
upward path. Renter occupied housing units totaled
42.6 million units in the fourth quarter of 2015, a
300,000 unit advance from the fourth quarter of
2014, based on U.S. Census Bureau data. National
vacancy rates averaged 7.0 percent for rental
housing during the fourth quarter, unchanged from
the same period in 2014. Median rents for rental
units averaged $850 by the end of the year.
Industrial properties found favorable conditions in

2015 due to international trade and solid gains in
online retail sales. National vacancies for industrial
buildings dropped in the single digits during the
year, leading to higher rents.
Net absorption of industrial space totaled 231.2
million square feet in 2015, based on data from JLL.
With new supply clocking in at 177.3 million square
feet, availability rates declined to 6.4 percent by the
fourth quarter. Industrial rents rose 5.6 percent
over the year, to an average of $4.93 per square
foot.
With consumers keeping spending on an upward
trajectory, the retail sector recorded positive
demand matched by restrained supply, leading to
declining vacancies and moderately growing rents.
14

Investments
Sales Volume
CPPI
$150
60
40
$50
20
0
2006Q1
2006Q4
2007Q3
2008Q2
2009Q1
2009Q4
2010Q3
2011Q2
2012Q1
2012Q4
2013Q3
2014Q2
2015Q1
2015Q4
$-
Source: Real Capital Analytics
With global economies hitting a slow patch in 2015,

U.S. property markets became an even stronger
contender for cross-border investors, as well. Toptier markets in gateway cities continued as the
major targets of investor activity. However, posting
higher yields and strengthening economies,
secondary and tertiary markets remained on the list
of investor destinations during the year.
Prices
2015.Q4
2015.Q2
2014.Q4
2014.Q2
2013.Q4
2013.Q2
2012.Q4
2012.Q2
2011.Q4
2011.Q2
2010.Q4
2010.Q2
30%
20%
10%
0%
-10%
-20%
140
-30%
120 -40%
100 -50%
80
$100
Sales Volume
2009.Q4
$200
Exhibit 3.2: REALTOR CRE Markets (YoY

% Chg)
2009.Q2
Billions
Exhibit 3.1: CRE Sales Volume & Prices

($2.5M+)
In comparison to the high-end deals, 82.7 percent of

commercial REALTORS reported transactions below
the $2.0 million threshold in 2015. Although many
REALTORS participate in transactions above $2.5
million per deal, they frequently serve a segment of
the commercial real estate market for which data
are generally not as widely reported, which we term
the small CRE transactions (SCRE).
2008.Q4
Commercial real estate (CRE) investment trends

were positive in 2015, following on last years tail
winds. Sales of large CRE transactions (LCRE)over
$2.5Madvanced 23 percent year-over-year,
totaling $534 billion, based on data from Real
Capital Analytics (RCA). Investor demand for
properties continued on an upward path, as
economic fundamentals, broadening lending
sources and capital followed returns. Prices for
commercial assets reached new records, surpassing
prior 2007 peaks. Based on RCAs Commercial
Property Price Index, commercial prices rose 12.3
percent in 2015 compared with the previous year.
Capitalization rates averaged 6.5 percent during the
year across all property types, a 16 basis point
decline year-over-year.
Source: NAR
Based on National Association of REALTORS (NAR)

data for the SCRE market, sales volume increased
20.5 percent on a yearly basis in 2015. The strong
increase mirrored the renewed investor interest in
stabile markets and properties offering higher
yields. Prices for REALTORS commercial
transactions advanced 8.5 percent year-over-year, a
slower pace than in LCRE transactions. The data
underscore an important point about the recovery
and growth in SCRE markets. The rebound in
smaller markets was delayed by three years and the
rate of price growth has been shallower.
In 2015, inventory shortage dominated the list of
concerns for SCRE markets. Cap rates averaged 7.8
percent over the year, a 40 basis point decline from
2014. Yields in SCRE markets continued to offer a
premium compared with the 6.5 percent average
recorded in LCRE transactions during the year.
15

Capital Markets
Capital markets proved favorable for commercial
real estate during 2015, riding the rising tide of the
past two years. Major capital providers found new
energy in the growing values of commercial assets
and competed for deals, leading to steep
acceleration in prices for some property sectors,
especially apartments and CBD office buildings.
The U.S. investment market totaled $6.2 trillion in
2015, with 57.3 percent of the figure comprising
debt-based investment assets and the remainder
accounted for by equity-based properties. On the
debt side, chartered depository institutions (banks)
accounted for the bulk of capital providers, with
about half the total market holdings, as the wave of
low interest rates continued through the end of the
year. The second largest share of debt holders was
represented by commercial mortgage backed
securities (CMBS), collateralized debt obligations
(CDOs), and other asset backed securities (ABS)
holders, making up 18.0 percent of total, based on
data from the Federal Reserve.
Exhibit 3.3: CRE Debt Universe
Government-sponsored enterprises (GSEs) were the

third largest debt holder, with 12.0 percent of total,
dominating the financing in the multi-family
segment. Life insurance companies continued as
active participants in debt markets, accounting for
11.0 percent of the debt universe.
On the equity side of CRE financing, where equity
investors held $2.6 trillion in assets, private equity
accounted for 43.0 percent of capital, followed by
listed and non-listed REITs, which made up 32.0
percent of financing in 2015, according to Situs
RERC. Pension funds, both domestic and crossborder were the third largest capital provider group,
representing 14.0 percent of the equity market. The
remainder was evenly distributed between groups
comprised of life insurance companies, commercial
banks, corporations, foreign investors and others.
Exhibit 3.4: CRE Equity Investments
U.S. Chartered
Depository Institutions
Private Equity
CMBS, CDO, other ABS
REITs
Pension Funds
GSEs (Freddie, Fannie)
Life Insurance Cos.

Commercial Banks
Life Insurance
Companies
Source: Federal Reserve Board
Corporations
Foreign Banking
Offices in U.S.
Foreign Investors
Other
Gov't, GSEs & Others
Sources: Situs RERC, NAREIT, PREA, AFIRE, Prequin, Real Capital
16

Lending
The lending landscape in large commercial real
of REALTORS commercial deals, on par with the
estate (LCRE) markets broadened further in 2015,
previous year. Private investors were the third main
compared with the prior five years, as sources of
capital providers, accounting for 12.0 percent of
funding actively competed for deals. Based on RCA
deals during 2015. National banks came in fourth
data, CMBS originators accounted for 21.0 percent
place, with 8.0 percent market share. The Small
of lending at the high end of the market.
Business Administration and credit unions shared an
Government-sponsored enterprises (GSEs) were the equal proportion, with 6.0 percent of the market
second largest source of lending, with 18.0 percent
each. Life insurance companies were much less
of total transactions, followed by national banks,
active in REALTOR markets, representing 3.0
which comprised 16.0 percent of deals. Regional
percent of deals, while CMBS conduits accounted
and local banks made up 15.0 percent of total
for only 2.0 percent of funding, tied with REITs.
volume, while life insurance companies accounted
Public companies and international banks made
for 12.0 percent. Financial institutions, international up about 1.0 percent of all sales.
banks and private investors rounded-up the funding
Exhibit 3.6: REALTOR CRE Lending Sources
sources, with 10.0 percent, 7.0 percent and 2.0
100%
percent, respectively, of total sales.
Exhibit 3.5: RCA Lending Sources ($2.5M+)
100%
90%
Small Business
Administration
REITs
80%
Regional Banks
70%
Public Cos.
90%
80%
Pvt/Other
70%
Reg'l/Local Bank
60%
Private Investors
60%
Nat'l Bank
50%
Other
50%
Int'l Bank
40%
Insurance
Local/Comm. Banks
30%
Gov't Agency
30%
20%
Financial
20%
CMBS
0%
International banks
10%
Credit Unions
Based on NARs 2016 survey data, capital markets

display a fundamentally different landscape. Local
and community banks were the largest lending
group in REALTORS commercial markets in 2015,
accounting for 31.0 percent of transactions. Local
and community banks maintained market share
from 2014, when they made up 32.0 percent of the
market. The second largest capital source in 2015
were regional banks, which captured 25.0 percent
2016
2015
2014
2013
0%
Source: Real Capital Analytics
2012
2011 2012 2013 2014 2015
Life Insurance Cos.
2011
10%
National Banks
40%
CMBS
Source: NAR
The lending survey highlights the marked

differences in the LCRE markets versus the SCRE
markets. Debt financing represents a much-larger
portion of capital in SCRE markets, whereas LCRE
deals benefit from significant equity contributions.
For regional and community bankswhich account
for 56.0 percent of all capital in REALTOR
marketscompliance costs stemming from financial
17

Lending, continued
regulations have made a stronger impact on
available capital for CRE deals. With higher costs of
compliance and higher capital reserve requirements
for CRE loans, regional and community banks have
been more cautious in their lending during 2015,
resulting in tightening of capital, a reversal of the
trend since 2013. In 2015, 33.0 percent of
REALTORS reported tightening lending conditions,
compared with 22.0 percent in 2014 and 28.0
percent in 2013.
Exhibit 3.7: Does Bank Capital for CRE
Remain Obstacle to Sales?
Exhibit 3.8: Causes of Insufficient Bank

Capital for CRE Lending:
100%
Other, please specify
90%
80%
Global economic
uncertainty
70%
U.S. Economic
uncertainty
60%
Inability of banks to
dispose of distressed
assets
New/proposed US
legislative and
regulatory initiatives
Regulatory
uncertainty for
financial institutions
Slow-down in
pooling/packaging of
CMBS
Reduced NOI,
property values, and
equity
50%
40%
30%
Yes
41%
No
59%
20%
10%
0%
2012 2013 2014 2015 2016
Source: NAR
In addition, 59.0 percent of REALTORS reported

that insufficient bank capital remains an obstacle to
sales in SCRE markets. The main reason comes from
new and proposed legislative and regulatory
initiativesDodd-Frank, lease accounting, carried
interest, etc.which were cited by 25.0 percent of
respondents. Another 17.0 percent indicated that
regulatory uncertainty for financial institutions was
an important barrier to bank lending for CRE
projects, tied with U.S. economic uncertainty. The
third main reason was a combination of reduced net
operating income, reduced property values and
equity.
18
SURVEY HIGHLIGHTS
19
SURVEY RESULTS: Highlights

61% of respondents closed deals in 2015
REALTORS closed an average of 8 commercial
transactions
94% of sales were valued at or below $5 million
Cash comprised 26% of all transactions
61% of transactions had financing with LTV equal
to or higher than 70%
17% of respondents had international
clients/investors
Sales composition:
- Office CBD: 8%
- Office Suburban: 12%
- Industrial Warehouse: 14%
- Industrial Flex: 8%
- Multi-family: 15%
- Retail Strip Center: 12%
- Retail Mall: 2%
- Land: 18%
- Hotel: 2%
- Other: 8%
Net operating income (NOI) of sold/leased
properties increased in 57% of markets over the
past eight years
Lending conditions tightened for 33% of
respondents and eased in 31% of respondents
markets
Failed sales due solely to appraised values
declined from 22% in 2014 to 17% in 2015.
Top sources of capital:

- Local/community banks: 31%
- Regional banks: 25%
- Private investors: 12%
- National banks (Big four): 8%
- Small Business Administration: 6%
- Credit unions : 6%
- Life insurance companies: 3%
- REITs: 2%
- CMBS: 2%
- Public companies: 1%
- International banks: 0.7%
27% used the Small Business Administration
refinance program
40% of sales failed due to lack of financing
- Loan underwriting standards
caused 54% of financing failures
- 20% caused by appraisals/valuation
- 12% due to financing availability
15% of deals failed to secure re-financing,

compared with 50% in the 2012 report
Debt-to-service coverage ratio (DSCR) was 1.4.
59% of respondents find insufficient CRE bank
capital due to: - Legislative/regulatory initiatives: 25%
- Financial regulatory uncertainty: 17%
- U.S. Economic uncertainty: 17%
- Reduced NOI, values & equity: 13%
- Disposition of distressed assets: 7%
- Global economic uncertainty: 7%
- Pooling/packaging of CMBS: 4%
The main reasons for failed sales due to appraisals:
- NOI (Net Operating Income): 31%
- Economic obsolescence: 15%
- Deteriorated property financials: 14%
- Location obsolescence: 13%
- Zoning: 7%
- Environmental conditions: 5%
- Lack of energy efficiency: 2%
20
SURVEY RESULTS
21
SURVEY RESULTS
Exhibit 5.1: Closed Sales During the Year
Market Environment
During 2015, 61.0 percent of REALTORS who
responded to the survey completed a commercial
real estate sale. Respondents reported that they
closed an average of eight sale transactions during
the year. The majority of REALTORS94.0
percentreported average transaction values
below $5.0 million.
The survey data indicates that 18.0 percent of sales

comprised land transactions, the largest share of all
property types. Multifamily properties were the
second most transacted property type, accounting
for 15.0 percent of all deals, followed by industrial
warehouses, at 14.0 percent. Suburban offices and
strip retail centers made up an equal share of
transactions12.0 percent.
Yes
No
N/A
100%
80%
60%
40%
20%
0%
2011
2012
2013
2014
2015
2016
Exhibit 5.2: Transactions by Property Type

0%
5%
10%
15%
20%
Office: CBD
Office: Suburban
Industrial: Warehouse
REALTORS reported that 17.0 percent of
Industrial: Flex
transactions involved international clients or
investors. The measure has been consistent over the
Multi-family
past five years.
Retail: Strip Center
Retail: Mall
We are hopeful for an above normal CRE in the Phoenix
Metro area with large numbers of small business
openings already showing for 2016. Availability of
additional lending capital would increase activity as we
push into our next expansion of single family housing
bringing increased CRE activity into the expanding
areas.
- Arizona
My transactions are never in California as the cap rates
are too low in my state... my investors go out of state.
- California
Rents are high so it's understandable that Lenders want
50% down if the rental market changes they could end
up with owners struggling to repay the debt.
- California
Land
Hotel
Exhibit 5.3: Sales to International

Clients/Investors
Yes
No
100%
80%
60%
40%
20%
0%
2012
2013
2014
2015
2016
22

Market Environment
I work around the country and find differences in all the

markets, mainly due to demand not appraisals.
- Illinois
Exhibit 5.4: Change in net operating

income ($/SF) of properties sold/leased
from 4th quarter of 2007 to 4th quarter of
2015
Decreased 50% - 75%
100%
Decreased 40% - 49%
Good properties, well maintained and well managed,

well leased are not having any issues with availability of
capital, appraisals, or LTV issues (cap rates). Its the
junk some people are putting out there to slide off into
someone else's portfolio that is having a problem, and
brokers are looking for someone to blame. Buyers are
not stupid.
- Kentucky
90%
50%
Decreased 20% - 24%
I see that buyers ask for a higher cap rate than the
market will provide.
- Montana
40%
Decreased 10% - 19%
30%
No Change
20%
Increased 10% - 15%
10%
Increased 5% - 9%
0%
Increased 1% - 4%
My answers may be regional and not applicable

nationally. However, a serious employment issue exists,
skilled and unskilled, and many industrial factories than
used to employ 50-200 people are now nothing more
than distribution centers, employing 5 people: 4 forklift
operators and 1 warehouse manager!
- Ohio
Decreased 35% - 39%
80%
Decreased 30% - 34%
70%
Decreased 25% - 29%
60%
2012 2013 2014 2015 2016
Exhibit 5.5: Expectations for Cap Rate Movement in Next 2-3 Years
0%
20%
40%
60%
80%
100%
Office CBD
Office Suburban
Industrial Distribution/Warehouse
Industrial Flex
Retail: Mall
Retail: Neighborhood Shopping Center
Retail: Strip Center
Apartment: Market-Oriented
Apartment: Affordable
Apartment: Student Housing
Hotel
Land
Lower by more than 100 bps

Lower by 50-100 bps
Lower by 1-49 bps
Same
Higher 1- 49 bps
Higher 50-100 bps
Higher by over 100 bps
23

Lending Environment
Exhibit 5.7: Average Loan-to-Value for CRE

Transactions
The majority of sales were financed in 2015, as cash

100%
comprised 26.0 percent of all deals, a smaller
90%
proportion than in 2014.
Bank financing, in particular, was an important
source of capital for commercial transactions,
comprising 64.0 percent of capital. Local and
community banks played a central role, with 31.0
percent of the market, followed by regional banks,
at 25.0 percent. National and international banks
accounted for a combined 9.0 percent of capital.
Lending conditions took a step back during the year,
according to survey respondents. Over a third of
respondents indicated that lending conditions
experienced tightening. This change marked a shift
from the trend of the prior five years.
Exhibit 5.6: Change in Lending Conditions
over Past Year
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Eased
Significantly
Other
100% Cash
80%
50%
70%
55%
60%
60%
50%
65%
40%
70%
30%
75%
20%
80%
10%
85%
90%
0%
2011 2012 2013 2014 2015 2016
Many commercial real estate properties are sold at the

cap rate of below 7%. To obtain an 80% LTV loan at 5%
interest for 10 to 15 years, loan will have a debt service
of equal or greater than NOI. That has to change soon!
- Texas
Eased Somewhat The regulatory environment is making the development

and acquisition business much harder for individuals and
small to medium players to compete against REITs and
Not Changed
institutional investors. Reporting requirements, fees,
legal costs related to transaction size have significant
impact on the yields for smaller investments.
Tightened
- Texas
Somewhat
Tightened
Significantly
National lenders have best rates, but are way too

conservative. They are not lending even for well
capitalized deals.
- Wisconsin
Commercial loans above $1 million are available.

Commercial loans below $1 million are difficult because
they are not handled directly by commercial loan officers.
Lack of experience results in a fits and starts application
process with seemingly reluctant commitment and
closing process. It is easier to get a large loan done than
a smaller loan.
- Vermont
24

Lending Environment
Exhibit 5.8: Percent of REALTORS
Reporting Failed Sales Transaction Due to
Lack of Financing
Exhibit 5.9: Reasons for Lack of Financing
100%
80%
60%
N/A
40%
No
20%
Yes
0%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2011 2012 2013 2014 2015 2016
Other
Appraisal/valuation
Loan underwriting/lender
requirements
Financing availability
2016
Dodd-Frank has forced lending institutions to look

ONLY at a businesss bottom line for income and only
add back in depreciation, which for LLCs and Sole
proprietors makes it almost impossible to get them
financing for anything!
- Missouri
Smaller, local banks still are able to make a quicker
commitment to borrowers.
- New York
Local Banks are getting it done right now. Large

banks only want large deals. They are no longer
interested in small business
- Oregon
Lending is still difficult unless it is an owner occupied
building or has long term leases in place.
- Pennsylvania
Lending problems are due to lack of quality

borrowers, not lack of capital by lending institutions.
- Oregon
The Dodd-Frank act is the one greatest hindrance to

the commercial real estate market activity in the US
today. The Act constricts business and should be
eliminated.
- Colorado

Reporting Failed Re-Financing Transaction
Exhibit 5.11: Reasons for Lack of ReFinancing Funding
100%
100%
80%
Other (please specify)
80%
60%
No
40%
Yes
40%
20%
20%
0%
0%
2011
2012
2013
2014
2015
Appraisal/valuation
60%
Loan underwriting/lender
requirements
Financing availability
2016
25

Lending Environment
SBAtakes way too long, often limited knowledge
of fine grain local circumstances, clients often must
be able to move on their situation quickly or lose
their opportunity. Thus there is a need for an
'Entrepreneurial Warehouse' brain-trust to educate,
groom and promote new entrepreneurs how to get
started quickly and smoothly.
- Pennsylvania
Private Lenders and Hard Money Lenders lend
money to Investors and they should not be restricted
by the Dodd Frank Act. Commercial banks are
limited to Amounts and certain numbers of
properties a person can hold.
- Arizona
Seems lenders are having difficulties lending,
especially to small and medium businesses.
- Arizona
Need further training of FDIC and OTC regulators on
the nuances of commercial real estate including
understanding obsolescence, effects of changing
buying trends, retail uses, etc.
- California
The big banks are running freely and need to be
refocused. Since they were given the second wave of
funds they have been out to close the market to all
but themselves and stay in control.
- California
There is a concern that the regulatory environment
is very restrictive. Some commercial lenders have
expressed that they are having problems getting
loans approved.
- California
Exhibit 5.12: Involved in CRE Transaction

supported by SBA Loan
100%
80%
60%
N/A
40%
No
20%
Yes
0%
2011 2012 2013 2014 2015 2016
Exhibit 5.13: If answered "No to SBA

Loan, the reason was
Did not know the program
existed
8%
Burdensome application and

reporting requirements
Due to past SBA experiences
21%
6%
Client had other source(s) of

financing
56%
9%
The ongoing evolution of lending regulations will, over

time, change lenders from using their judgement and
relying on the numbers. Regional lenders won't be able to
compete - national lenders will continue to be out of
touch. Here on the Delmarva - that's exactly opposite of
what we need to grow our economy and the next
generation of leaders.
- Maryland
26

Appraisals
Appraisals for commercial transactions notched
improvement in 2015. The incidence of failed sales
due solely to appraised values declined from 22.0
percent in 2014 to 17.0 percent in 2015. The main
culprit for low appraisals is reduced net operating
income (NOI), which was cited by 31.0 percent of
REALTORS. Economic obsolescence and
deteriorating property finances were the second
and third reasons for appraisal issues. Location
obsolescence and zoning were reported as
problems by 13.0 percent and 7.0 percent of
respondents, respectively.

Reporting Transaction Failures Due to
Appraised Value
100%
80%
60%
No
40%
Yes
20%
0%
2015
2016
Exhibit 5.15: Main Reasons for Appraisal

Problems
There is a dramatic problem with how regional and
national banks hire appraisers. There is no opportunity
for proper selection by bank employees in the cities
where the appraisals are being performed, often leading
to hiring geographically incompetent individuals.
- California
Since in my state, lenders have to use an appraiser from

a "pool", the appraiser most of the time does not know
the area or product type.
- Illinois
Other
100%
90%
Lack of energy efficiency
80%
60%
Environmental conditions
(air quality, contamination)
Zoning
50%
Location obsolescence
70%
40%
Economic obsolescence
30%
20%
Deteriorating fiscal issues

with property
NOI (Net Operating Income)
10%
0%
The problem is lenders are concerned about finding the

cheapest appraisal, which leads to lower quality work.
Encourage quality and be willing to pay a little more for
good work.
- Indiana
2015
2016
Exhibit 5.16: Mezzanine Debt Required

Due to Appraised Value Lower than Price
100%
Lending Officers are not allowed to select appraiser, so

the lending officer and appraiser are disconnected. That
regulatory requirement is hurting the tertiary commercial
markets and hindering small business acquisition of real
estate.
- Tennessee
80%
60%
No
40%
Yes
20%
0%
2015
2016
27

Appraisals
Exhibit 5.17: How Familiar Are Appraisers

with the Market?
REALTORS reported that most appraisers are

unfamiliar with local markets and property types.
Only 17.0 percent indicated that appraisers are
Always familiar, while 65.0 percent indicated
Sometimes. Familiarity with the property type
displayed a similar picture, with 63.0 percent of
respondents stating that appraisers are
Sometimes familiar, while 27.0 percent reported
that appraisers are Always familiar. There was a
cloud casting a longer shadow over the appraisal
situation60.0 percent of REALTORS reported that
lenders generally seek quality appraisers who are
familiar with the local market and property types.
That means that two-in-five transactions are
appraised by someone who may not be familiar
with the market or the property type.
100%
80%
Not sure; N/A
60%
Never
40%
Rarely
Sometimes
20%
Always
0%
2015
2016
Exhibit 5.18: How Familiar Are Appraisers

with the Property Type?
100%
80%
It seems that the appraisal process is flawed. We have

out of area appraisers picking from a pool of local
appraisal opportunities though they are not in the least
qualified to do appraisals in the those areas. For
example, appraisers from Annapolis or Baltimore or
Salisbury take on appraisal jobs in areas which are over
an hour or two drive away from their home offices. They
have to see the contract before they can give a value.
What's the point of the appraisal if they are allowed to
see the contract price and then can make the price
appraisal fit that price? It's so ridiculous and wrong.
- Maryland
There is NO shortage of appraisers at this time. If there is
a shortage in the future, it will be because our fees are so
low we cannot afford to hire trainees. I stopped doing
AMC work after the crash. Now I no longer need
mortgage work so it is on the "back burner". They
increased requirements and liability, but NOT the fees.
So good-bye AMCs!
- Virginia
Appraisers are generally aware of the market they serve

however are restricted by Federal guidelines that are
now outdated.
- Washington
Not sure; N/A
60%
Never
40%
Rarely
Sometimes
20%
Always
0%
2015
2016
Exhibit 5.19: Do Lenders Seek Appraisers

Familiar with Market and Property Type?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
No
Yes
2015
2016
28
Methodology of NARs 2016 CRE Lending Survey

Within the framework of improving market
conditions, the National Association of REALTORS
conducted a national survey of commercial real
estate members, focused on lending conditions.
In February and March of 2015, NAR invited a
random sample of 65,420 REALTORS with an
interest in commercial real estate to fill out an
online survey. A total of 1,241 responses were
received for an overall response rate of 1.9 percent.
29
The National Association of REALTORS, The Voice for Real Estate, is Americas
largest trade association, representing over 1.1 million members, including NARs
institutes, societies and councils, involved in all aspects of the real estate industry.
NAR membership includes brokers, salespeople, property managers, appraisers,
counselors and others engaged in both residential and commercial real estate. The
term REALTOR is a registered collective membership mark that identifies a real
estate professional who is a member of the National Association of REALTORS and
subscribes to its strict Code of Ethics. Working for America's property owners, the
National Association provides a facility for professional development, research and
exchange of information among its members and to the public and government for
the purpose of preserving the free enterprise system and the right to own real
property.
RESEARCH DIVISION
The Mission of the National Association of REALTORS Research Division is to collect
and disseminate timely, accurate and comprehensive real estate data and to conduct
economic analysis in order to inform and engage members, consumers, and policy
makers and the media in a professional and accessible manner.
To find out about other products from NARs Research Division, visit
www.REALTOR.org/research-and-statistics.

RESEARCH DIVISION
500 New Jersey Avenue, NW
Washington, DC 20001
202.383.1000
30
Commercial Real Estate Lending Trends 2016

2016 Commercial Lending Trends Survey

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National Association of REALTORS

COMMERCIAL REAL ESTATE

Commercial Real Estate Lending Trends 2016

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

NATIONAL ASSOCIATION OF REALTORS

NATIONAL ASSOCIATION of REALTORS

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

3 | Commercial Real Estate.

NATIONAL ASSOCIATION of REALTORS

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

Lending conditions in REALTOR markets notched another year of sustainable

NATIONAL ASSOCIATION of REALTORS

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

investments typically make up 13 15 percent of

Exhibit 2.1: Real GDP (% Annual Chg.)

Source: NAR, BEA

The changes in GDP through the year were mirrored

International trade continued to play an increasing

NATIONAL ASSOCIATION of REALTORS

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

at a negative $544 billion for the year. The

employment and higher household wealth

Exhibit 2.3: Real Net Exports (Bil Chn

Exhibit 2.4: Real Consumer Spending (Bil

Government spending, another major GDP

NATIONAL ASSOCIATION of REALTORS

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

Household Formation ('000s)

The housing recovery led the way during 2015. With

Source: Census Bureau

Aside from an increase in sales, the steady drop in

Over the same 2009-15 period, Americas

Exhibit 2.5: NAR Months' Supply of Existing

The supply of new homes has averaged about

In turn, home prices have been rising at a healthy

NATIONAL ASSOCIATION of REALTORS

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

As of the end of 2015, 94.1 million Americans 16

Exhibit 2.7: Payroll Employment (Change,

However, it is worth pointing out that there is a

NATIONAL ASSOCIATION of REALTORS

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

Longer-dated bond yields had not moved up

In addition, with apartment rents having risen at 4.0

Owners Equivalent Rent component of the

Annual Growth Rate, %

Source: National Association of REALTORS

NATIONAL ASSOCIATION of REALTORS

COMMERCIAL REAL ESTATE

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

COMMERCIAL REAL ESTATE

Retail net absorption totaled 88.3 million square

Industrial properties found favorable conditions in

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

Source: Real Capital Analytics

With global economies hitting a slow patch in 2015,

Exhibit 3.2: REALTOR CRE Markets (YoY

Exhibit 3.1: CRE Sales Volume & Prices

In comparison to the high-end deals, 82.7 percent of

Commercial real estate (CRE) investment trends

Based on National Association of REALTORS (NAR)

NATIONAL ASSOCIATION of REALTORS

COMMERCIAL REAL ESTATE LENDING TRENDS 2016

Exhibit 3.3: CRE Debt Universe