You have three basic options to consider when shopping for a commercial mortgage loan.  You can choose to:

1.   Finance your property with a lender you already do business with, or

2.   Shop the mortgage market on your own, or

3.   Employ the services of a commercial mortgage broker to shop the market

For most property owners the option that significantly improves your chances of getting the best possible loan for your property is using the services of a mortgage broker.  As self-serving at that may sound, come to your own conclusion as you review the advantages and disadvantages of each option discussed below.

Option #1 – Finance your property with your existing lender – Convenience is the primary advantage of financing your property with a lender you currently do business with.  It certainly is the path of least resistance and in most cases it should be the quickest way to get the job done.  The disadvantage of this approach is that you will never know whether you received the best rates and terms currently in the market.  The likelihood is that another lender will be more competitive than your current lender.

Option #2 – Shop the mortgage market on your own – The advantage of this option is that you have a higher probability of finding better loan terms than financing your property with your existing lender.  The disadvantage is that it will take considerably more time and effort on your part.  If you take this option I have these suggestions for you:

1. Hunt down the most competitive lenders. Contact commercial real estate professionals (real estate brokers, appraisers, escrow officers, etc) or other owners of commercial real estate who can recommend lenders for you to contact.

2. Contact several lenders for loan quotes. To do this correctly you should put together a preliminary loan package that includes at a minimum the following documentation:

a.   Two years plus the current YTD operating history on the property

b.   A current rent roll

c.    Photos of the property

d.   Personal financial statements on the borrowers

e.   Two years of personal tax returns

f.     A brief resume on the owners

Ask each lender to provide you their loan quote in writing.  Fight the urge to accept a loan quote over the phone.  A loan quote over the phone is meaningless.  Get it in writing.

3. Let Lender A know that Lender B has a better loan quote. It is not uncommon, even in today’s lending environment, that if a lender knows he doesn’t have the best quote on the table that he will go back to his underwriter and see if they can tweak the quote to make it more competitive.  Asking for an improvement in a loan quote should be done tactfully.  If done in a heavy-handed manner it will only irritate the lenders which may backfire.

4. Do not focus too heavily on one loan parameter – Often times a borrower chooses the lender that he considers best based on his one particular “hot button.”  There is nothing wrong with this approach, but a better approach is to review the pros and cons of each loan quote and then decide.  It is not uncommon that when comparing the loan quotes in detail, another lender is chosen rather than the one originally considered the borrower’s first choice.

5. Do not dribble the loan documentation to the lender. Once you have chosen your lender, one of the most important recommendations I can give you is to make the loan process as easy as possible for the lender.  You do this by completing the lender’s forms quickly, thoroughly and accurately.  A borrower who is unwilling to focus on getting the forms to the lender in a timely manner is putting his loan at risk.

6. Do not violate the “golden rule” of lending – which is, “He who has the gold makes the rules.”  Each lender has its own unique way of underwriting, processing and closing loans.  Don’t get into an argument about their process.  Provide them with what they are asking for and you’ll be better off in the end.

Option #3 – Employ the services of a commercial mortgage broker to shop the market – There are four distinct advantages of taking this option:

1. The primary advantage of using a mortgage broker is that he knows which lenders have the most competitive rates.  It’s his job to know.

2. Compared to shopping the market on your own, this option takes significantly less time and effort on the part of the owner.  Much of the “heavy lifting” of finding the right lender and processing of the loan is performed by the mortgage broker, not by you.

3. Establishing trust between the borrower and the lender is a vital component to insure a successful loan outcome.  If you’ve never worked with a particular lender, a trust relationship has not been established.  On the other hand, a commercial mortgage broker may have worked on several loans with this lender.  They know each other.  They know each other’s idiosyncrasies and because of their prior relationship there is a higher probability of getting the loan closed with a mortgage broker than by you going directly to the same lender.

4. There are times in the loan process where you need someone to be your advocate, someone who strenuously defends your best interests.  This can best be accomplished by a mortgage broker who has an established relationship with the lender.  The lender’s loan officer inadequately fills this role as he works for the lender.  He is being paid by the lender.  Whose best interest do you think he is looking after?

The disadvantage of this option is that it may cost you an additional fee or a slightly higher interest rate for using the services of a mortgage broker, but it may not.  It just depends on the lender.  If you decide to use a mortgage broker I have these suggestions for you:

1. Do not interview residential mortgage brokers. Do not consider using the services of a residential mortgage broker as he does not have the expertise to finance commercial real estate.

2. Interview more than one commercial mortgage broker. Get two or three recommendations for commercial mortgage brokers to interview.  Prepare several questions ahead of time.  Through the course of the interview find out whether you can trust them, whether they are competent and whether they are likeable.  Finish your interview with this question: How are you different than your competition?  Then choose one, and only one.

3. Do not use more than one commercial mortgage broker. When a borrower uses the services of more than one mortgage broker without their knowledge, all trust between borrower and broker evaporates.  If Mortgage Broker A calls his lending sources and finds out that Mortgage Broker B has already talked to one or more of his favorite lenders, do you think Mortgage Broker A is going to work as hard on this loan request?  Not a chance.

4. Request a side-by-side comparison of loan quotes. A good mortgage broker will get you multiple quotes and then show them in a side-by-side comparison.  At the top of the page will be Lender A, Lender B, Lender C, etc.  Down the page will be all the loan parameters a borrower needs to know in order to make an informed decision, such as loan amount, interest rate, loan term, amortization, loan fee, other financing costs, type of prepayment penalty, cash required at closing or estimated cash back on a refinance, before and after tax cash-on-cash return, to name just a few.  This side-by-side comparison of the loan quotes makes it much easier to choose the lender that best meets your particular needs.

Which of the three options you ultimately choose depends on which advantages and disadvantages are most important to you.  However, I firmly believe that a mortgage broker’s counsel can help a borrower avoid serious pitfalls when shopping for a loan.  A wise man once said, “Plans fail for lack of counsel, but with many advisers they succeed.”  That is why an owner optimizes his chances of getting the best possible loan for his property when employing the services of a commercial mortgage broker.

Vacancy rates continue to rise in most commercial sectors and are not expected to level out in most markets until the end of this year or early 2011, according to the National Association of Realtors^®.

Lawrence Yun, NAR chief economist, said there is one bright spot in commercial real estate. ”The multifamily sector can expect increased demand as the economy creates jobs and new households are formed, likely in the second half of this year,” he said. ”However, the office, warehouse and retail sectors continue to experience the delayed effects of the recession. These sectors should see gradual improvement after jobs pick up and create additional demand for space, meaning a broader improvement in commercial real estate is likely in 2011.”

The Society of Industrial and Office Realtors^®, in its SIOR Commercial Real Estate Index, an attitudinal survey of nearly 700 local market experts,(1) confirms that significant fallout from the recession remains, but to a lesser extent.

The SIOR index, measuring 10 variables, increased 2.7 percentage points to 38.2 in the first quarter, compared with a level of 100 that represents a balanced marketplace. This is the second gain following nearly three years of declines; the last time the market was in equilibrium was in the third quarter of 2007.

Development activity remains at a standstill with nine out of 10 respondents saying that it is virtually nonexistent in their markets.

Looking at the overall market, commercial vacancy rates appear to be approaching a plateau, according to NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK.(2) The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.

Office Market
With an elevated level of sublease space available, vacancy rates in the office sector are projected to increase from 16.9 percent in the first quarter of this year to 17.6 percent in the first quarter of 2011, but should ease later next year.

Annual office rent is likely to fall 2.3 percent this year and decline another 2.1 percent in 2011. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is forecast to be a negative 24.6 million square feet this year and then a positive 25.5 million in 2011.

Industrial Market
Leasing activity in the industrial sector is below historical levels with higher vacancies, more tenant concessions from landlords and a steeper decline in rental rates. In addition, obsolete structures remain on the market. Industrial vacancy rates are expected to rise from 14.3 percent in the first quarter of 2010 to 14.8 percent in the first quarter of 2011, then decline modestly as the year progresses.

Annual industrial rent will probably drop 6.3 percent this year, and decline another 1.5 percent in 2011. Net absorption of industrial space in 58 markets tracked is seen at a negative 90.0 million square feet this year and a positive 135.6 million in 2011.

Retail Market
Retail vacancy rates should rise modestly from 12.6 percent in the first quarter of this year to 12.8 percent in the first quarter of 2011, and should hold at that level for most of next year.

Average retail rent is projected to decline 1.5 percent in 2010, then edge up by 0.4 percent next year. Net absorption of retail space in 53 tracked markets is likely to be a negative 3.7 million square feet this year and then a positive 8.9 million in 2011.

Multifamily Market
The apartment rental market — multifamily housing — is expected to benefit from an improving economy and job market. Multifamily vacancy rates are forecast to decline from 7.3 percent in the first quarter of this year to 6.3 percent in the first quarter of 2011.

With recent additions to supply, average rent is likely to slip 1.5 percent this year, and then rise 1.2 percent in 2011. Multifamily net absorption should be 145,700 units in 59 tracked metro areas this year, and another 214,500 in 2011.

The COMMERCIAL REAL ESTATE OUTLOOK is published by the NAR Research Division for the commercial community. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.

The NAR commercial components include commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and the NAR commercial affiliate organizations — CCIM Institute, Institute of Real Estate Management, Realtors^® Land Institute, Society of Industrial and Office Realtors^®, and Counselors of Real Estate.

Approximately 79,000 NAR and institute affiliate members offer commercial brokerage services.

The National Association of Realtors^®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.

(1) The SIOR Commercial Real Estate Index, conducted by SIOR and analyzed by NAR Research, is a diffusion index based on market conditions as viewed by local SIOR experts. For more information contact Richard Hollander, SIOR, at 202/449-8200.

(2) Publication of additional analyses, including metropolitan data, will be posted under Economists’ Commentary in the Research area of Realtor.org in coming weeks.

The next commercial real estate forecast and quarterly market report will be released on August 26.