Phoenix borrowers seek alternative financing sources for commercial loans as lenders become more selective

One mortgage banking firm in Phoenix found that the top preferred asset classes of the first quarter by lenders were multifamily, industrial, retail and others. The office asset class raised a few more questions among lenders.

Phoenix borrowers seek alternative financing sources for commercial loans as lenders become more selective

Phoenix mortgage banking found that its commercial real estate loans were down by about 50% year over year in the Phoenix metro area during the first quarter 2022. However, its local team believes a rebound is on the horizon.

Adam Parker, principal of Gantry's Phoenix branch, attributes the slowdown in loan production to "significantly less sales transactions" and higher borrowing rates. Gantry has seen an increase in commercial mortgages for the purchase and refinance of land and property as borrowing rates "stabilized."

Parker stated that construction lenders in particular are not interested in funding new projects. Part of the reason is that banks are worried about their deposits, and so they hold capital very tightly. This has really shifted the loan requests from banks to alternative lenders.

Insurance companies are a factor

Parker suggested that life insurance companies could be an alternative. Parker said that a portion of the investment portfolio of insurance companies is set aside for commercial mortgages. Parker stated that insurance companies tend to be more selective about the deals and projects that they choose to fund.

He said that "they're going to still be disciplined with the way they underwrite, but they also want to get [capital] into circulation."

In the first quarter, Gantry attributed its largest loan volume and value to life insurance companies.

Gantry's findings show that lenders across the board preferred multifamily, industrial (outside malls), retail (outside malls), mobile home parks, self-storage and medical offices as the most popular asset classes in the first quarter. Lenders have a more favorable outlook for hotels and resorts, as the market has improved since Covid-19.

'True' office demand

Parker stated that new projects on the office market raises a few questions for lenders, especially around true demand.

There's real concern about the future demand. "There's a lot of uncertainty about how to fund a new project because we don't know what the demand is," he explained. The Phoenix office market is doing well, but in order to get funding for a new deal you will need to find a great location and explain why the project should be built.

According to CBRE Group Inc., just over 750,000 square foot of office space were under construction in Q1 2023. Experts have stated that they believe between 1.5 million and 2 million square feet at any one time is a healthy benchmark of the Phoenix office market.

Hines' Senior Director of Managing Chris Anderson told The Phoenix Business Journal that at the end 2022 he was looking for "true demand" in office space. This means how much space is used by companies on a daily basis.

Charlie von Arentschildt is the first vice president of CBRE. He called the first quarter of 2023 a "stabilizing period" for the office sector. Phoenix's negative absorption rate for Q1 2023 was 60,582 sq ft, a much smaller number than the 1.6 million sq ft of Q4 2022.

The vacancy rate decreased slightly from 23.9% in Q4 2022, to 23.6% by Q1 2023. Meanwhile, the average rents for Phoenix Metro are up 24 cents a square foot over a quarter.