Commercial Magazine

Streamlining the Small-Balance Space

These borrowers can save time and money through specialized loan processes

By Ellen Comeaux

As a growing number of commercial mortgage lenders chase larger loans to meet aggressive capital-deployment targets, it leaves an important question: What about small-balance loans? According to a recap of this year’s Mortgage Bankers Association (MBA) Commercial and Multifamily Finance Convention and Expo, many lenders are reportedly moving out of the small-balance space.

As lenders increase allocations for commercial mortgages, many choose to focus on larger loans in lieu of increasing staff to handle numerous small-balance loans. This means that borrowers and brokers who want loans for less than $10 million — let alone less than $5 million — have fewer options today. But the recap of the MBA event also noted that this transition has created an opportunity for more small-balance lenders to enter the commercial lending space and fill the gaps.
Many borrowers need less than $10 million for their real estate needs, which range from multifamily and student housing to self-storage and industrial flex space. Even with the recent rapid rise in interest rates, market demand for commercial real estate investment remains robust. And with strong demand in a more challenging loan market, mortgage brokers who work in the small-balance space could benefit greatly from streamlined processes that save them and their borrowers time and money.

Healthy performance

Due to healthy property fundamentals and strong values, the MBA has predicted commercial and multifamily mortgage lending volumes will be close to the industrywide performance of 2021. A key sector within the small-balance lending market is multifamily housing. According to a first-quarter 2022 report from Arbor Realty Trust, loans sized between $1 million and $7.5 million for apartment buildings are projected to reach $64.4 billion this year, the second most active year on record. In 2021, this volume skyrocketed to $94.1 billion, up from $35.6 billion in 2020.
Unanchored retail properties also have spurred a notable share of small-balance lending. During a 12-month period ending this past March, more than 90 million square feet of retail space was absorbed nationwide, according to an analysis by Marcus & Millichap. That’s the largest amount in nearly five years, and the real estate brokerage reported that this largely stems from people leaving home more frequently after two years of pandemic-related quarantines.
Alongside brick-and-mortar retail, a 2021 Boxwood Means analysis showed booming demand for small-cap industrial assets as retailers and logistics companies sought space to support the growing needs of e-commerce.

Should loans for less than $10 million require the same process as loans for $60 million? Should deals for unanchored strip retail centers be subject to the same processes as deals for big-city office towers?

Boxwood Means reported that in the third quarter of last year, absorption for industrial properties of less than 50,000 square feet recorded the highest quarterly expansion in nearly seven years. The additional 29.4 million square feet occupied by tenants triggered a decline of 30 basis points in the national vacancy rate, which hit a record low of 3%.

Specialized process

Today’s small-balance loans are primarily handled the same way as any other type of commercial real estate loan. But should loans for less than $10 million require the same process as loans for $60 million? Should deals for unanchored strip retail centers be subject to the same processes as deals for big-city office towers?
Mortgage brokers around the country are calling for a tailored way to handle applications for small-balance loans, which would save weeks of time and thousands of dollars. They want to streamline the underwriting process, shorten the myriad of checklists and reduce the need to negotiate documents.
“Small-loan borrowers are trying to save time and money,” said Jeff Stein, executive vice president and co-head of CBRE Capital Markets’ Houston debt and structured finance team. “They want efficiency, faster decisions and cheaper closing prices that the small-cap programs can afford.”

Valuable changes

Stein said that about 75% of the deals he works with are of the small-balance variety. With promising forecasts from both MBA and Arbor, other brokers who work in this space will be kept similarly busy this year. And these brokers could benefit from a more programmatic approach from origination through closing, along with different loan parameters for different types of properties.
Valuable changes to the small-balance loan process could increase efficiency and speed of closing. For example, a scoring model on the origination side that limits due-diligence items for approval could be implemented. In turn, borrowers could expect a faster approval — maybe two days instead of two weeks. Non-negotiable and borrower-friendly loan documents could remove the need for outside legal counsel. This could save borrowers up to $20,000 or more.
Shorter borrower questionnaires could be helpful, as could streamlined environmental reviews with less need for estoppels, PCAs (property condition assessments) or SNDAs (subordination, nondisturbance and attornment agreements). The cost of a PCA, for example, often ranges anywhere from $500 to as much as $10,000. Instead, a simple site visit may suffice, especially if it’s a newer property.
Finally, the process could benefit from standardized loan documents that cap closing costs, along with aggregated loan portals for due diligence using a centralized hub such as Dropbox. All of this could mean closing within 45 to 60 days, a change that would often be much faster and simpler for all parties.
Other considerations for small-balance loans could include pricing and partial recourse. Small-balance programs are typically priced at a slight premium to larger loan offerings. Additionally, as small-balance lenders are more willing to look at partial recourse to offset any concerns, they’re typically more reliant on historical cash flow and property performance as opposed to the collateral condition or market analytics.

Current market

Everyone is keeping an eye on interest rates and inflation, of course, but the underlying fundamentals for commercial real estate remain strong. Banks continue to close deals across many types of assets.
In the first few months of this year, retail and self-storage accounted for significant shares of overall deal volume. Multifamily deals, including student-housing transactions, were plentiful. In first-quarter 2022, origination volumes for this sector greatly exceeded the same period in 2021, and many of these loans are of the small-balance variety.
Small-balance loans also can be a more attractive option for first-time borrowers and those looking to renovate properties. Each of these groups sometimes struggle to secure agency loans from Fannie Mae and Freddie Mac. The Arbor report indicated that new multifamily investors were “drawn to the asset class because of its strong performance track record and attractiveness as an all-weather investment.”
Lenders that currently offer small-balance multifamily programs include the agencies as well as a handful of life insurance companies and banks. Some lenders have even launched dedicated small-balance programs. Although the commercial mortgage industry is constantly evolving, there will always be demand for a small-balance solution. What needs to change is the approach to these loans, with lenders doing so in a manner that delivers efficiency and surety of execution for all parties. ●


  • Ellen Comeaux

    Ellen Comeaux is a senior vice president and commercial division leader at TIAA Bank. As a member of the bank’s leadership team, she directs commercial loan origination activities and drives strategy for the company’s commercial real estate and equipment-finance business lines. She has more than 30 years of experience in the equipment-finance business, and previously worked with MetLife Capital and GE Capital. Reach Comeaux at

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