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Should you consider lending for commercial real estate?

1/20/2023

Should you consider lending for commercial real estate?

Taking out a loan to help finance property isn't anything new. People in their personal capacity and businesses alike have been using mortgages to buy real estate for almost century. However, with a recession either on the horizon or already upon us, borrowing money to purchase immovable goods is becoming an increasingly risky.

In the past, a loan or mortgage was a no-brainer. Now, there's a lot more to take into account when making that decision. Why? What's changed in the market? What are the pros and cons of warehouse lending, and is it the right choice for your company?

The current state of commercial real estate

As Bloomberg explains, similar to the 2008 financial crisis, many financial institutions that lend money are finding themselves in an economic predicament. After good, healthy borrowing and repayment patterns over the past few years, lenders are now finding that their coffers are emptying. Consequently, those who usually provide financial assistance to companies in the supply chain are making fewer offers or significantly raising their interest rates.

Furthermore, commercial property remains exorbitant for the most part. While this is also true for rental prices, it's prudent to remember that sellers can charge a premium that may not be representative of a property's true value, simply because warehousing demand is exceeding supply. However, the market is expected to cool down somewhat as the post-pandemic economic boom begins a steady decline.

Is borrowing money a good idea?

Unfortunately, there's no cut and dry answer to this question. Every business is different and will have unique needs and circumstances. Regardless, there are a few factors you should bear in mind when contemplating financial assistance:

  • Do due diligence: You must conduct research on the property you're eyeing to see if it's worth its proverbial weight in gold. The last thing you want is to owe large sums of money on a building or piece of land that's defective or unsatisfactory.
  • Remember inflation: Unfortunately for borrowers, all loans come at an additional price: interest. It's essential to factor in any interest rates, as well as inflation, when determining whether you can afford loan repayments.
  • Run a profit forecast: Although we can't predict the future with absolute certainty, we can sometimes make educated guesses as to what it might hold. It's worth doing the math to see if you'll generate enough revenue during the repayment period.
  • Strike a bargain: Very rarely are real estate prices completely non-negotiable. Although it's currently a seller's market, if people are hesitant to purchase property, you might have some leverage when it comes to setting the sale price. This will, in turn, affect the mortgage budget you'll require and plan for.

These are just a few elements to deliberate when deciding whether to borrow money to purchase commercial real estate for your warehouse. As always, keep an eye on economic trends and consult financial experts.