The advantages of commercial construction loans

The performance of the commercial real estate market in the United States was severely affected by the pandemic in 2020 as key sectors of the economy, including retail and hospitality, had to shut down their operations during the first three quarters of the year at least.

A report from the International Monetary Fund (IMF) highlighted some of the consequences that the virus crisis has had on commercial real estate, emphasizing that significant distortions in the valuation of properties have emerged as a result of a drop in the properties’ operating income due to lower rent payments and a sustained decline in the demand for properties from big investment trusts as the sector remains unappealing for investors until the health contingency is fully resolved.

However, an old Wall Street adage says that the best time to buy is when there’s blood on the street, and that might be precisely the situation in the commercial real estate market in the United States at the moment, with the currently depressed scenario possibly opening up opportunities for those who have a long-term view.

In the following article, we will outline the benefits and advantages of commercial construction loans for companies who are currently seeking to develop projects at a moment when the conditions are perhaps more advantageous than ever amid lower land values and near-zero interest rates.

The situation of commercial real estate after the pandemic

With hundreds of businesses shutting down their operations during the pandemic, it seems difficult to think that commercial real estate could be a good business in 2021.

However, the same data cited previously from the IMF also emphasizes that as the economic recovery in the US gains momentum, the distortions currently seen in the value of commercial properties will likely be diminished as the demand for available properties progressively increases. This higher demand would primarily come from businesses that should emerge to substitute those that couldn’t withstand the economic downturn caused by the pandemic.

In this scenario, companies who wish to develop new projects in promising neighborhoods and areas of their cities could rely on different financing instruments to fund their projects at a point when interest rates are sitting at historically low levels.

What are commercial constructions loans, and how can they be used?

Commercial construction loans are financing instruments extended by financial institutions, non-traditional lenders, and government-sponsored entities (GSE) to assist construction companies in developing their projects.

These loans could work similarly to an installment loan, or they could be structured in a way that benefits the developer.

The interest rates applicable to these loans tend to be lower compared to regular construction loans, and this is especially true if the instrument is guaranteed by an institution such as the Small Business Administration (SBA), which offers support for loans for up to $5 million with interest rates ranging from 2% to 10% depending on the type of loan the company applies for.

Moreover, private companies like Camino Financial and other online lenders offer loans with repayment periods of up to 60 months and competitive interest rates starting at 12% per year that could be used by developers either as a bridge loan or as a complementary financing instrument that will accompany the project’s equity investment.

Commercial construction loans vs. other financing alternatives

One of the things that make loans for commercial real estate projects stand out from regular loans when funding a new development is their sector-specific nature, as lenders who offer these kinds of loans usually have a better understanding of the dynamics of this complex sector and can offer tailored conditions based on the specifics of each project and the developer’s timetable.

Meanwhile, it is important to note that this type of loan is not just for construction companies since businesses from other sectors of the economy can also employ these loans to build facilities such as manufacturing plants, office buildings, and warehouses that they might need to keep expanding their operations.

Bottom line

If you think that the pandemic has probably put the commercial real estate sector to sleep for a long time, a booming economy supported by trillions of dollars injected into the system by policymakers in the United States could prove otherwise.

Therefore, if you are a developer seeking funding for your project, commercial construction loans can become your financial ally to fulfill those ambitious endeavors.