This slide deck discusses real estate lending credit considerations including advantages, risks, funding needs, and more for the three most-researched real estate industries on RMA's eStatement Studies.

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A QUICK GUIDE TO
CREDIT CONSIDERATIONS IN
REAL ESTATE LENDING
Credit risk considerations for the three
most-researched real estate industries on
RMA’s eStatement Studies

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REAL ESTATE
• Lessors of Nonresidential Buildings
(except Miniwarehouses)1
• Commercial and Institutional Building
Construction2
• Lessors of Residential Buildings and
Dwellings3

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COMMERCIAL LESSORS
1.
LESSORS OF
NONRESIDENTIAL BUILDINGS
(EXCEPT MINI-WAREHOUSES)

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CREDIT CONSIDERATIONS FOR
COMMERCIAL LESSORS: ADVANTAGES
1
As the business sector improves, so
does demand for office, industrial,
retail, and hospitality space.
The commercial leasing industry is
expanding, boosting occupancy, and
providing opportunities to increase
rents.
2

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CREDIT CONSIDERATIONS FOR
COMMERCIAL LESSORS: ADVANTAGES (CONT.)
3
As operating revenue increases for
commercial lessors, so should
property value.
Volume and pricing for high-quality
properties in the coastal markets
have increased, a similar increase is
expected in some secondary
markets.
4

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CREDIT CONSIDERATIONS FOR
COMMERCIAL LESSORS: RISKS
Demand varies by property type.
Demand for office space
depends on office-related
employment in the finance,
insurance, technology, and
real estate industries.
Demand for hospitality
spaces is influenced by
consumer spending,
local business activity,
the cost of travel, and
the strength of the U.S.
dollar.
Demand for retail space
depends on consumer
spending and increased
employment in the finance,
insurance, technology, and
real estate industries.
Demand for industrial
space is influenced by
proximity to a labor pool,
transportation, local tax
rates, and the presence
of related industries.

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CREDIT CONSIDERATIONS FOR
COMMERCIAL LESSORS: RISKS (CONT.)
Equally
important in
determining
how this sector
will fare is
Understanding
how the national
economy affects
local
conditions—
which can vary
widely by
State
Town

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CREDIT CONSIDERATIONS FOR
COMMERCIAL LESSORS: RISKS (CONT.)
Demographics Tax burden
Zoning
Utility
infrastructure
Demand in metropolitan
markets can also be
influenced by:

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COMMERCIAL LESSORS:
FUNDING NEEDS
Typically need
funds for:
Land acquisition.
Land preparation and construction.
Property acquisition.
Working capital for ongoing financing
needs.

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CREDIT RISK ISSUES TO CONSIDER FOR
COMMERCIAL LESSORS
To make the
smartest
lending
decisions,
rely on
eStatement
Studies.
• Key candidate success factors that indicate a good
credit risk.
• The critical external factors likely to affect the
industry.
• Trends to watch that may have adverse effects on
the industry.

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2.
COMMERCIAL AND
INSTITUTIONAL
BUILDING CONSTRUCTION

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CREDIT CONSIDERATIONS FOR COMMERCIAL
AND INSTITUTIONAL BUILDERS: ADVANTAGES
As the nation’s economy
rebounds, demand for
new commercial and
institutional building
construction is growing
at a steady pace.
Office building
construction has been on
an upswing over the last
few years.
Institutional
construction is
expected to bounce
back significantly after
several years of a flat
market, especially in the
K-12 educational and public
works sectors.
The rising trend of
consumer spending
and subsequent
demand for new retail and
office space is expected to
grow industry revenue.
$

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CREDIT CONSIDERATIONS FOR COMMERCIAL
AND INSTITUTIONAL BUILDERS: RISKS
Commercial and institutional builders rely on steel (a commodity
prone to fluctuation) to construct a wide variety of structures.
Builders who try to
generate business by
keeping customer prices low
could see negative effects
on their profits.
External and internal factors
determine how builders fare.
Offsetting rising building
material costs, tracking trends
in office vacancy rates and
consumer spending, and
taking advantage of
opportunities in private
nonresidential construction
will be key.
Delays caused by labor
disputes or supply chain
problems can also affect
profitability.
Commercial and institutional
builders must maintain access
to skilled workers and
subcontractors, secure new
contracts without compromising
price margins, and explore the
pros and cons of upgrading to
higher-quality construction
materials.

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COMMERCIAL AND INSTITUTIONAL BUILDERS:
FUNDING NEEDS
Typically need
funds for:
Land acquisition and development.
Repositioning of underperforming
properties.
Equipment financing.
Tract development.
Construction labor and materials.
Working capital for operating
expenses.

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CREDIT RISK ISSUES TO CONSIDER FOR
COMMERCIAL AND INSTITUTIONAL BUILDERS
To make the
smartest
lending
decisions,
rely on
eStatement
Studies.
• How consumer spending affects demand for
commercial and institutional building
construction.
• Insight into key external drivers that influence
profitability in this sector.
• The sectors that serve as major sources of
demand and investments in this industry.
• How interest rates affect operating expenses and
profitability.
• How local government spending can be an
indicator of profitability in this sector.

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3.
LESSORS OF RESIDENTIAL
BUILDINGS AND DWELLINGS

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CREDIT CONSIDERATIONS FOR
RESIDENTIAL LESSORS: ADVANTAGES
1Rising employment and income growth
are enhancing the residential rental sector.
3
Renting is an attractive option for professionals
who are now part of a highly mobile workforce
that wants to remain flexible and move quickly
without the constraints of homeownership.
Millennials are ripe for starting their own
households but, because of low savings and
high education debt, most lean toward
renting rather than home buying.
2

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CREDIT CONSIDERATIONS FOR
RESIDENTIAL LESSORS: ADVANTAGES (CONT.)
4
Residential rental demand is expected to result
in a rapid leasing pace which will push up
occupancy and rent growth.
6
Renting is an attractive option for professionals
who are now part of a highly mobile workforce
that wants to remain flexible and move quickly
without the constraints of homeownership.
Many Baby Boomers are testing for
retirement by renting, particularly
in coastal areas.
5

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CREDIT CONSIDERATIONS FOR
RESIDENTIAL LESSORS: RISKS
Demand varies
by geographic
sector, with just
a handful of
areas driving
high national
absorption rates.
Areas of greatest
demand for
residential rentals:
Sun Belt,
West Coast, and
Washington, D.C.
metropolitan
areas, Chicago
and Boston. If
employment in
these areas
slows, so will the
demand for
residential rentals.
A construction
surge of
multifamily
housing in areas
that are currently
in demand can
pose localized
risk in this
segment, driving
down profitability.
If housing prices
fall sharply and/or
earnings growth
improves, this
could weigh
heavily on the
growth of the
rental sector as
homeownership
becomes more
affordable.

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RESIDENTIAL LESSORS:
FUNDING NEEDS
Typically need
funds for:
Property renovations and repairs.
Property acquisition.
Land acquisition.
Land preparation and construction.
Working capital.

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CREDIT RISK ISSUES TO CONSIDER FOR
RESIDENTIAL LESSORS
To make the
smartest
lending
decisions,
rely on
eStatement
Studies.
• Which markets have the best potential to
outperform?
• Observations into consumer habits that are
affecting demand.
• Important questions to ask candidates that
will help you determine risk.
• Trends to monitor that would indicate a
change in the sector.

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ABOUT eSTATEMENT STUDIESSM
eStatement Studies is the online source for anyone
involved in analyzing financial statements. It features two
data set types:
• Financial Ratio Benchmarks.
• Industry Default Probabilities and Cash Flow.
eStatement Studies gives you the power to make more
informed financial decisions.
For more information, contact
eStatementStudies@rmahq.org

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