Banks See Buyer, Builder Market at Current Rates

Bankers want to know absorption rates for local commercial space before loaning big bucks to potential builders. Interest rates at 50-year lows mean there’s little room for profit even without an error.

The prime lending rate, as reported in The Wall Street Journal, is 4.25 percent. It was 11.5 percent in 1989.

Many banks can offer 15- and 20-year fixed rate commercial loans but the terms will likely include a prepayment penalty or other hedges.

Commercial banks buy money from the Federal Home Loan Bank and the Federal Reserve. Then they build in their spread before selling the money to borrowers. But rates can change and affect a bank’s overall portfolio.

“Banks’ cost of funds have not dropped in relation to where prime is today,” said Jeff Lynch, president of United Bank.

“The bank has to make money, and when you look at the cost of doing business it’s just not coming down that much. Look around here at what banks have to spend on bricks and mortar. Salaries are up and ATMs are a convenience product but not a money maker.”

Lynch said it’s still crucial to have a firm handle on what’s happening with existing and planned infrastructure.

That’s why United Bank is one of seven local institutions that subscribe to the Reed Report, a twice-annual study published to date by Reed & Associates Inc. commercial appraisers in Springdale (see Whispers, p. 3). The report provides extensive data on both the local commercial and residential property markets.

The December report found that about 14 percent of the Class “A” and Class “B” professional office space in the area’s five largest cities was vacant.

When considering only the premiere Class “A” space David Erstine, a market research analyst at Reed, found that 15.07 percent of the 2.01 million SF surveyed was vacant. That compares to 16.04 percent of Class “A” vacancies in May 2002, when he said the inaugural study was less comprehensive.

“I think the market needed some breathing space,” Erstine said. “It needed a break from construction, and when our next report comes out in late June we’ll see if that actually occurred.”

The June study will add SF for new projects that have obtained building permits since December.

First National Bank of Springdale, Regions Bank and four Arvest Bank Group Inc. banks also use the report.

Kent Williamson, executive vice president and loan manager at Arvest Bank-Springdale, said although there’s more 3- to 5-year loans being issued, it’s a good time for businesses to buy, build or renegotiate their lease.

In Springdale, which doesn’t have the large-scale office space of its neighbors, many smaller businesses have realized they can build their own facility for what they’re paying on a lease, Williamson said.

“The biggest thing for lenders is making sure clients understand long-term interest rate risk,” he said. “You have to put things to a pencil and paper because those who were in business during the late 1980s know rates can go up.”