No need to fret about the quality of commercial loans — yet

Commercial loan standards haven’t slipped back to 2007 levels, but worrying trends are creeping up.

These days, borrowers are financing a smaller chunk of a property’s overall value, lessening the risk of loans, according to a CBRE study of fixed-rate senior loans across the country. The average loan-to-value ratio uncovered in the study was around 65 percent, which means borrowers are making a down payment equal to 35 percent of the sale price. Just before the recession, they were plunking down less than 30 percent, according to the study.

“Underwriting is approaching 2005 levels, but we are nowhere near the deterioration in 2007, so on balance it is a good story,” Mark Gallagher, senior strategist at CBRE Econometric Advisors, told Crain’s. “But I think we have to be on the watch.”

Borrowers are also using a smaller bit of their cash flow to pay back debt, which makes current loans less risky, according to Crain’s. The debt service ratio was just above 1.3 this year, while in 2007 it was lower, according to Crain’s.

Still, rising interest rates and a rise in pro forma income underwriting, which bases loans on projected income rather than an exact amount, could cause problems. Borrowers looking to refinance in the coming years could have issues as interest rates rise, and projected rents or income that don’t mean fuzzy projections could leave borrowers in an untenable position. [Crain’s] — Julie Strickland