After hearing negative stories in the news about commercial real estate, many small business owners put plans to purchase commercial properties on hold. But with the SBA 504 loan program, now is actually a great time to buy!
In this overview, you’ll get context to the news, including insight from community bankers and commercial real estate brokers. Discover why small business properties are different than those in the news and how the SBA 504 loan can help you achieve your goals.
Commercial real estate: Why the current market is good for small business owners
If you’re thinking about making the leap from leasing to owning, it helps to have context on the current news. Important points to consider are that:
1) The vast majority of negative news pertains to properties in major urban areas.
“While the media focuses primarily on major metropolitan areas, in small- and mid-size towns and cities, commercial real estate remains a good investment,” explains Chris Levy, President and CEO of Pursuit, which finances small businesses throughout New York, New Jersey, Pennsylvania, Connecticut, Illinois, Nevada, and Washington.
Chris’s observation is backed by experience and data, says Ken Countermine, SVP, Commercial Real Estate Banking and Capital Markets at Community Bank. He says, “What’s in the media is mostly based on major metropolitan markets. What I know is that in the Capital Region and our bank’s other markets, commercial real estate is holding up well. Many customers see this as an investment opportunity.”
2) Office space in smaller cities and towns is outperforming major metros.
Unless the property you’re considering is located in a place like New York City or San Francisco, where downtown cores are still impacted by the shift to remote work, the value of office space is strong.
Richard Sleasman, SIOR, President/Managing Director and Licensed Real Estate Broker, CBRE Upstate NY, says “Along the I-90 corridor from Albany to Buffalo, office space continues to perform slightly better than our bigger market cities in the northeast. Some examples are Hartford at 18.4%, Boston at 16.6%, Manhattan at 18.5%, and Philadelphia at 22.6%. By contrast, as of Q4 2023, the vacancy rates for office space in the secondary markets were stronger, including Albany at 12.5%, Syracuse at 12.8%, Rochester at 17.3%, and Buffalo at 15.8%. These markets tend to be less volatile than bigger cities.”
3) Large-scale office buildings, big-box stores, shopping malls, and similar commercial properties are facing challenges, but that’s not the case for the types of owner-occupied properties that small businesses tend to purchase.
In part, that’s because large-scale properties are often highly leveraged, in which corporate investors use equity to purchase more properties. Now, these investors are pinched by lower occupancy rates and higher interest payments. In contrast to that, the types of commercial properties that are purchased by small businesses – such as small offices, restaurants, retail storefronts, and boutique inns – are in high demand.
Daniel Fariello, President of Capital Bank serving New York State’s Capital Region, explains the situation from a community bank’s perspective.
“From a lender’s perspective, an owner-occupied commercial property used by a small business isn’t even close to the same type of asset as a large office building in a major metro area,” he says. “We prefer to fund building loans to small businesses throughout our region using the SBA 504 program.”
4) Markets outside of major metros also show strength for industrial properties which makes them a good investment, says Richard Sleasman, with CBRE data supporting this finding.
“Although there’s been some cooling off over the past 12 months, the industrial market continues to be strong. The rapid pace of speculative construction in the larger northeast industrial markets left millions of square feet available, pushing up the national vacancy rate to 5.3% as of Q1 2024, according to CBRE,” Richard says.
He continues, “The upstate New York markets experienced very tight markets from 2018 through mid-year 2023, but the lack of speculative construction kept the supply low while demand remained fairly strong. This dynamic has kept the vacancy rates in Q4 2023 along I-90 between 2-4 +/- % range from Albany to Buffalo, with Rochester the highest at 4.4%. The tight markets also continue to yield the highest recorded rents. Upstate New York remains a very robust industrial region.”
Financing for small business property purchases: The SBA 504 program
“The SBA 504 is one of the most popular loan options because there are so many benefits for small business owners,” Chris says. The SBA 504 loan program provides long-term, fixed-rate financing of up to $5.5 million for major fixed assets, including owner-occupied real estate and heavy equipment.
To fully appreciate why now is a great time to move forward with an SBA 504 loan, it helps to understand how it works. SBA 504 loans are made in partnership between a business owner, a bank, and a Community Development Corporation (CDC) that’s approved by the SBA. For a typical SBA 504 loan, the bank and CDC finance up to 90% of total project costs, while the owner’s down-payment requirement is just 10-15%.
Here’s how that breaks down:
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- A business owner makes a 10% down payment on the project
- A bank funds 50% of project costs with a conventional mortgage
- A CDC, like Pursuit, funds 40% of project costs with an SBA 504 loan
For example, for a $500,000 project, your bank loan would be $250,000, your loan with Pursuit would be $200,000 and your down payment would be just $50,000 – compared to conventional commercial bank loans, which typically require 30-40% for the owner’s down payment.
In addition, the SBA 504 loan offers a fixed interest rate, so payments are predictable, and longer loan terms – up to 25 years – so payments are much more affordable. That’s why many business owners find that the costs of property ownership are on par with leasing while they gain all the benefits including tax advantages, equity growth, and long-term stabilization of building-occupancy costs.
Also, consider the peace of mind that comes with owning your own property: No more fear of skyrocketing rent, or of making improvements to someone else’s property only to build their equity (not yours), or even the possibility of losing your property.
Markets – and lenders – make a difference
“In our markets, the emphasis is on growth and opportunity for owner-occupied properties,” Chris says. “CDCs, including Pursuit, are eager to partner with community banks to provide SBA 504 loans for small business owners.”
Still, the current economic climate makes it essential for the right lending partnerships for the SBA 504 program. As Ken explains, “Commercial real estate in our regions remains an attractive investment and having Pursuit’s support keeps many of those investments within reach, because both inflation and interest rates have caused project costs to rise. As a result, small business owners may need additional guidance on their projects to get them funded.”
He continues, “This is where a strong partnership between a business owner, a bank, and Pursuit can be huge, because the tools that Pursuit offers can help borrowers get the financing needed to make a project a reality, either by assisting with equity constraints or improving cash flows due to longer repayment periods.”
Daniel emphasizes this, saying, “In upstate New York, where our bank is located, opportunities for economic growth abound – and the SBA 504 serves as a catalyst for community development through entrepreneurship, job creation, and strengthened local economies. That’s why financing owner-occupied properties is of high interest, particularly when we can partner with non-profit lenders like Pursuit. When we work together to support small businesses in our communities, everyone wins.”
Pursuit and our lending partners support small business success
Pursuit helps small business owners get the financing you need to start and grow your businesses, including gaining all the benefits of the SBA 504 loan program.
“Pursuit is committed to serving the business community with financing options that benefit small business owners,” says Chris. “I encourage you to talk to your bank about the SBA 504 program and give us a call, too.”
