Detroit’s not dead: A rise in conduit lending offers hope for Detroit’s economy
Sep 16, 2013
The city of Detroit rocked America when it filed for the largest municipal bankruptcy in U.S. history. Immediately, news outlets issued panic, labeling Detroit a lost city. Some $18 billion in debt and a dwindling tax base offered little solace.
But it’s not all bad news out of the Motor City. On the commercial real estate front, portfolio loans from Main Street banks have all but vanished, but conduit lending has recently picked up steam. Here’s why conduit lenders still have faith in the city, and why, despite all the naysayers, these loans prove Detroit’s not dead.
The rise of Detroit’s conduit lending
Since the 2008 market crash, federal regulations enacted under Dodd-Frank have restricted the amount of money local banks can lend for commercial real estate, putting a damper on commercial activity in the Detroit metropolitan area.
Without Main Street banks lending, investors have struggled to find financing for commercial real estate projects, so they have increasingly turned to conduit loans.
Conduit loans offer numerous benefits over traditional commercial mortgage loans. First, they offer lower interest rates than traditional commercial mortgage loans. Conduit loans boast flexible loan structures, since lenders are apt at adjusting a particular loan to a particular deal.
They also offer flexible terms and rate locks, and higher loan-to-value ratios — between 70% and 85%. Finally, conduit lenders can close loans faster than local banks because conduit lenders hire a staff solely designated to loan closures.
After Detroit filed for bankruptcy, conduit lenders continued to finance investment grade properties, increasing the number of conduit loans in the market.
Why are conduit lenders lending in Detroit?
On the one side, many banks view the Detroit market as too risky for loans and therefore choose not to finance. On the other side, conduit lenders offer loans that are backed by a pool of bonds, which ensure less risk when lending in an uncertain market. Since conduit lenders have more lending flexibility, they’ve become the sole financer in the Detroit market. Without local banks, conduit lenders face little to no competition.
Although many have written off Detroit’s economy as damaged, conduit lenders see the market differently. At the moment, the big three — Ford, GM, and Chrysler – continue to show positive sales growth, and the potential to breathe life back into the base economy. That information alone is enough to keep conduit lenders investing in Detroit.
Skies aren’t all gray for the future of Detroit. The strength of the big three and increased conduit lending offer hope that Detroit will come back from the brink. And if the Motor City still has some gas left, now might be an opportune time to lend and invest in the Detroit market.