How Is Commercial Retail Property Financing Typically Handled?

The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful:

In the retail space financing space, not a lot of financing is being done through local banks. Typically, they aren’t the best for commercial real estate investment, and instead many choose options like CMBS and lending from life insurance companies for longer loan options. Life insurance companies need to keep finances invested for policyholders, and commercial retail property lending fits nicely into this needed space. 

Richard Wilson: How is commercial retail property financing typically handled? Multi-family, there’s a lot of agency financing, some local banks. For retail spaces financing, is a lot of that done through local regional banks? Or how is a lot of this property getting financed? 

S.L. Van Der Zanden: Surprisingly, maybe, to a lot of people a lot of banks, I’d say most banks, aren’t very good at doing commercial loans for real estate. Just the way banks are set up and how the money works, they’re way better at doing short term loans than long-term loans. And that’s why we have things like CMBS, collateralized mortgage backed securities, where it’s really more of a bond and it ties to the treasury rates and it makes sense that way. A lot of the lending comes from life insurance companies. They have piles of money that they have to keep invested for their policyholders, and they sort of sit in the middle – they could do a 5 or a 10 year loan, mostly 10 year loans, where a bank is only comfortable in a 3 to 5 year zone maybe. The CMBS will do up to 20 years, but the problem with CMBS is there’s no one there on the other side of the table when you have problems. Banks are great for bridge financing short term stuff, lower interest rates if you’re immune to the recourse issues, but if you want non-recourse, a lot of it is being done by life companies. 

Richard: Okay.