Ready for takeoff

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While residential real estate continues to slow, more and more brokers are looking to an improving and even hot commercial market as a way to build business. CMP spoke to some brokers and lenders in this space and they are all in agreement that commercial deals are on the upswing

If you’re a commercial mortgage broker right now, there’s a good chance your phone is ringing off the hook If you’re not, you’re probably wishing you had at least one deal in the pipeline because after finishing 2011 strong, commercial real estate continues to be a hot market across the country.

“My early opinion is that this is busier already than it was last year,” says Dale Bilton, a commercial broker with DLC in Kitchener, Ont. “I’m getting steady referrals from every source, every contact and every division.”

It’s the same story for Scott Ede, managing partner at S&R Mortgage Group (Mortgage Alliance) in Calgary.

“I’m excited with what we’re seeing,” he says. “Our desks are absolutely full right now and there isn’t one of us wishing we didn’t have someone else to help us. Everything from hotels to convenience stores are on our plate, and you really get to pick and choose.”

After the global credit crisis hit, a lot of people in the commercial industry feared the worse, but instead what they got was only a modest slow down, capped off by a banner year in 2011. And the good news, according to Blake Cassidy, managing partner at Romspen Investment Corporation, is that “we’re anticipating another tremendous year; something that’s been building over the last five years.”

While he says that it’s always important to take a slightly pessimistic look, so that expectations aren’t inflated, “there is an abundance in the market on every sector right now,” he says, adding that Romspen is very “bullish” on Alberta and southern Ontario, in particular, and has also been fairly busy in Vancouver. The lender has even “moved a couple hundred million into hospitality,” he adds.

Bilton, who works only in Ontario but is part of a commercial network with DLC that works across the country, runs through the various commercial segments: industrial buildings are “fairly strong”; apartments are difficult to find “but there is an appetite for them with lenders if they make sense”: professional buildings, such as medical or high end office buildings, “are a pretty big demand right now”; there’s a “good appetite with good, decent lenders” for retail shops with apartments above; and surprisingly, in the non-profit sector, he’s seen two church deals “in the last week alone.”

In Calgary, Ede mentions land development deals that were stalled in 2008 are seeing a resurgence, but that the “bread and butter is in strip malls, warehouse condos and condo apartments.”

As far as hard number go, across the country they’re looking good, according to CB Richard Ellis: downtown vacancy rates in Q4 of 2011 dropped to 6.1 per cent from eight per cent, mostly on the back of the financial sector; suburban office vacancy rates were at 10.7 per cent, down from 11.3 per cent a year earlier; national availability rates for industrial were 6.6 per cent, down from 7.7 per cent; and in retail, shopping centres across the country will see two to three per cent vacancy rates (more or less full occupancy), while other older buildings are continually being transformed into loft-style offices, reported The Globe and Mail in January.

And while that may just sound like a bunch of numbers to some, for commercial brokers it all adds up to endless opportunities, so it comes as no surprise that more and more residential brokers are seriously considering trying to tap into this potentially lucrative extra finance stream.

Before you take the plunge

Just jumping into commercial isn’t that easy, as residential brokers will be unaccustomed to dealing with things such as environmental assessments, financial, tenancy and market analyses, proposing loan structuring and defining clear exit strategies for the lender. And of course there is the matter of financial statements.

“Every week at least once I have a request from someone who wants to join the team because they want to do commercial,” says Bilton. “They see the big deals and figure you’re making all kinds of money, but my response is if you don’t have the knowledge of a chartered accountant, that’s strike one. You need to be able to read financial statements as good as a CA if you’re going to take it to lenders.”

There are courses available, such as the ones offered at the Real Estate and Mortgage Institute of Canada (REMIC), as well as occasional seminars or talks at the\ various provincial broker associations. But even then it’s only scratching the surface.

In fact, the biggest mistake residential brokers make, says Ede, is “running into a commercial deal and thinking that they can do it. We think we can and we try it and we find out that we wasted time and lost business on it.”

Ad Lakhanpal, a Mortgage Alliance broker in the Greater Toronto Area, has been doing commercial deals for seven years, “and I’m still learning,” he says.

Currently, about 70 per cent of his business is residential and 30 per cent is commercial. “That 70 per cent keeps the regular cash flow going,” he says, adding that the major difference between doing residential and commercial is that with the former, the variety is in the type of borrower you work with, while in the latter the variety is with the type of lender. “And there’s a different lender for each type of property.”

And unfortunately, “there’s no simple Bible to go to for those,” says Bilton, who took five years of doing a residential/commercial split before going into commercial full time. Over his career, he’s built a “library of lenders, and I don’t know how anyone would figure out those sources on their own right away — it’s all self-taught,” he says.

Fortunately, lenders, especially outside of institutional ones, seem more than willing to help out.

“When you work with a co-operative lender they help you out,” says Lakhanpal. “They will tell you, ‘I need this and this’ and as your experience grows you start to anticipate what you will need.”

That’s because at the end of the day, says Mickey Baratz, principal broker and director of finance at Vector Financial Services, a private lender that’s been serving the Greater Toronto Area for almost 40 years, “the objective is to lend money. If a broker comes and he’s inexperienced, you’re not going to turn him away if the deal is good. You’re going to hold his hand.”

Romspen’s Cassidy agrees, saying that “we put ourselves in the borrower’s shoes. A residential guy will eventually come across a commercial transaction, and they can make as much on a $25-million deal as they can in a year of residential deals.”

After all, a one per cent fee, which is the average brokers charge, is $250,000.

“We don’t expect all our brokers to know everything about our products,” says Cassidy. “Just running through a deal on the phone I can tell with certainty if it will work. It’s not a waste of time.”

That said, it helps to be organized, and one common mistake, adds Baratz, is that some brokers think more paperwork equals better work.

“Some guys will dump hundreds of pages on you thinking it will be impressive. But all I need to start is a one-page executive summary, and once that is prepared, whetting the lender’s appetite, then bring on the rest.”

Not only does it save time for everyone, but it shows the lender that the broker is organized enough to compress everything into a page or two, which in turn helps sell the deal.

A helping hand

There’s no doubt that learning how to write commercial mortgages is daunting. And even after putting in the time and energy to try to grasp the business, there’s still a small chance that brokers won’t see immediate success

“I have never seen anybody go from residential to commercial and make a living,” says Ede.

But that’s no reason to pass on a plum commercial deal when it comes across your desk. In fact, by co-brokering it with a more experienced broker, there is still a handsome fee to be made.

“More people are realizing not to do commercial and give it to a specialist,” says Bilton, who offers a co-brokering deal open to all brokers, no matter their brokerage, whereby referring brokers get 25 per cent of the commission, and continue to get 25 per cent if the same client returns for more deals.

“If they’re really enthusiastic to learn then we can maybe do some deals together — if they’re good they won’t need me down the road — but right now 75 per cent of my deals are co-brokered,” he says.

And while the option is there to watch and learn from the sidelines, seeing what lenders Bilton goes to and learning which ones have an appetite for what, “most just say, ‘You run with it and let me know’,” he says.

That way, just for passing along a deal a broker can make “good change with very low effort,” he says.

Ede offers a very similar deal — on average a 20 per cent take of the commission, depending on the deal, that is ongoing for return clients.

“We now rely on getting business not just from Mortgage Alliance but from other large brokerages that we have built relationships with over the last four or five years,” he says, stressing that even if that initial client refers someone different to him, the broker still gets another commission based on their original referral.

“We build the broker up so that they are the most important part of deal,” he says.

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