Commercial real estate lending remains strong, with some sectors outperforming others
BLoans for commercial real estate and development remained stable throughout the first quarter as some sectors saw high demand and others remained somewhat weak as the COVID-19 pandemic passed a year.
Multi-family housing and manufacturing are the hottest sectors right now, while the hotel and restaurant industries are lagging behind. Commercial real estate experts say access to credit has not been an issue for projects or transactions, although some banks are doing a little more in-depth due diligence, asking more questions or increasing the requirements for credit. pre-rental and others.
“Banks always lend, (but) everything is just under a fine tooth comb to make sure the borrower has the capacity to repay these funds,” said Mark Ansara, managing director and senior vice president at Advantage Commercial Real Estate Services LLC in the township of Cascade. “I think it’s still fluid. There are just a few more hurdles that you need to overcome to get there. “
Lenders on a project built to specifications, for example, who wanted 20% less before the pandemic now demand 25% or more “depending on the location of the asset, its age and the leases in place.” Ansara said. Retail projects that are not located in a main corridor that previously required 50-70% pre-rental now need “more” 70-80%, he said.
“If you are not rock solid 70, 75 percent pre-leased or leased then under construction, it will be a tough sale to a bank,” Ansara said. “A really tough sale.”
Orion Construction Co. President Roger Rehkopf describes a construction credit market that is “a little more conservative” and “a little cautious” on some projects, although he hasn’t seen much change in underwriting standards.
“They just want to make sure everything is ready to go, and when you commit to having that many units completed by a certain date, you’re there,” Rehkopf said.
Part of that caution in construction comes from tight supply and rising lumber prices that could affect construction, he said.
Grand Rapids-based Orion Construction had to source and store inventory and supplies for future projects in order to cushion the price hike, Rehkopf said. The company currently has a 72 townhouse project where “we try to buy as much as we can buy”.
“The wood has gone crazy over the past 12 months (and) probably more over the past six months,” Rehkopf said.
Nick Rivette, partner at Saginaw Wirt-Rivette Group which has an office in Grand Rapids, said the company has had no difficulty securing funding through United Bank for the $ 10 million Legacies Village elderly community it is developing in Caledonia. Some banks are asking more questions and “deepening” due diligence, “but for us that’s a good thing,” Rivette said.
“Coming out of a crisis like this pandemic caused this,” he said. “This tightening of the belt is really a reflection of how we all perceive the risk of having gone through 15 quite traumatic months.”
Economists said bank balance sheets remained relatively good and they had plenty of liquidity for loans. The Wirt Rivette Group found that banks “have huge deposits and are currently looking to lend,” Rivette said, noting the firm’s close business relationships with a number of banks and co-ops. credit.
Commercial lenders for over a year have been busy working with clients on Federal Paycheck Protection Program loans that may have affected access to credit, and some have withdrawn from credit on certain classes of credit. market, Rivette said. He now sees them “coming out of the immediate crisis” and PPP.
“With a build period of 12 to 18 months, we’re going to see a return to normal and back out there,” Rivette said. “There are only a limited number of commercial lenders in this world and they were all busy with PPP loans. Now that they are able to breathe and focus on future business opportunities, it really refreshed us. “
Different crises, concerns remain
Unlike the recession that followed the 2008 US financial crisis, the deep economic decline last spring at the onset of the pandemic during state-imposed restrictions was not a banking crisis or a fundamental problem in the economy.
Economist Paul Isely, Associate Dean at Grand Valley State University‘s Seidman College of Business, has repeatedly emphasized this difference in recent economic outlook Cornerstone Alliance in Saint-Joseph.
“This is a virus and policies across the country that have been designed to keep the virus at bay,” Isely said.
Yet data from two recent surveys shows that nationwide bankers tightened lending when the economy fell sharply last year.
Among the 188 executives who responded to a publication on trade in industry Bank directorIn the 2021 Risk Survey conducted in January, 43% said they feared their bank was too focused on commercial real estate. Less than 25% had the same concern a year earlier in Bank director2020 risk survey. Concern this year was even greater for big banks, according to the survey.
Almost a third of survey respondents are concerned about loans to the hospitality industry which includes hotels and restaurants.
The survey results are “really indicative of a great deal of uncertainty which I think still lingers somewhat in the environment” at the national level, said Bank director Research Director Emily McCormick. “We’re starting to see the light at the end of the tunnel, but we’re not quite there yet.”
A quarterly survey in April of top national loan officers by the Federal Reserve found underwriting standards overall “have remained fundamentally unchanged as banks tighten standards on construction loans and land use planning and relaxed standards on multi-family loans.
“Banks have reported stronger demand for construction and land development and multi-family loans and have reported weaker demand for non-residential non-farm loans,” according to the Federal Reserve report on bank lending practices.
“ The pipeline remains strong ”
Recent quarterly bank earnings reports show a strong market for commercial real estate and construction loans.
Based on Grand Rapids Mercantile Bank Corp., for example, said it made commitments of $ 135 million in the first three months of 2021 for commercial construction and development loans it plans to fund over the next 12 to 18 months.
“Our construction pipeline remains strong,” Mercantile Bank chairman Ray Reitsma said in an April conference call with brokerage analysts. “The funding that we see in the very near future and that we can highlight some specificity is similar to…. the last two quarters.
Mercantile continues to “monitor the financial condition and credit performance,” particularly for hotels and accommodation, assisted living facilities, restaurants and entertainment, said Reitsma.
AT PNC Bank, underwriting standards for commercial real estate and construction / development loans have not changed over the past year, said Regional President Sean Welsh.
The industrial sector remains strong and multi-family housing is “a very good market,” he said.
“Some of the others (industries such as accommodation, office and retail) are probably a little bit on a hiatus and we’ll see where they go from here,” Welsh said. “I would say they’re sort of on a hiatus right now to see if the economy comes back and where the demand is going.”