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Published in Finance
Industrial real estate remains a hot market for commercial lenders. Industrial real estate remains a hot market for commercial lenders.

Industrial, multifamily residential remain ‘darlings’ for commercial real estate lending

BY Sunday, May 08, 2022 06:00pm

Lending to the commercial real estate sector remained strong through the first quarter, particularly for manufacturing and multifamily residential developments.

Lenders and commercial real estate professionals say credit to finance a project or transaction remains readily available, even with economic fluctuations and as high material and labor costs and supply constraints remain issues for new construction.

“There’s no shortage of banks looking to lend dollars. So really any deals we’ve had, we’ve had multiple banks interested in underwriting the deal,” said Michael Visser, an investment specialist at Advantage Commercial Real Estate Services LLC in Grand Rapids.

“We have a great group of banks here and they’re all looking to get funds deployed,” Visser added.

That’s particularly the case for manufacturing and industrial spaces as well as the multifamily residential sector where demand remains high.

Advantage Commercial Real Estate issued a report this month showing that first quarter demand for warehousing, distribution and fulfillment centers “is at an all-time high in West Michigan with quite possibly the lowest amount of available inventory the market has ever experienced.”

For industrial, manufacturing or multifamily deals, banks “are putting out money,” said Don Shoemaker, a partner and co-founder at commercial real estate firm Franklin Partners LLC.

Manufacturing and multifamily residential each are a “darling” in commercial real estate, Shoemaker said.

“Everybody wants to lend on that,” he said.

Meanwhile, banks generally reported solid growth rates for commercial lending for the first quarter.

Stephen Steinour, chairman, president and CEO of Huntington Bancshares Inc., told MiBiz in a recent interview that a surging manufacturing sector remains a strong sector for commercial real estate lending.

“Industrial space, you can’t have enough of it right now. Literally, there is a supply constraint there as well,” Steinour said.

In a recent visit to Grand Rapids, Steinour met with several large commercial real estate developers in West Michigan who reported that “they’re doing well,” he said.

While some areas in commercial real estate are stronger than others, “as a whole I don’t think there’s any one segment of our market where lenders” are pulling back, although “they might be looking at it in greater detail (and) they might have a wider pricing on it,” Visser said.

“Historically, West Michigan’s been a fairly conservative market and we tend to be a little more insulated from the volatility that’s been seen in other markets. That means we’re a slow growth market and the banks are willing to grow with us,” Visser said.  

Office gets closer look

One segment getting a closer look today to better gauge lending risk is office and the effects that remote work has had on market demand.

“We don’t know what that demand for offices will be over time with workplace flex policies, but I think the economic growth we’re going to see is going to sop up that existing supply over time,” Steinour said. “We’re watching it a little bit.”

Executives at other large regional banks in the West Michigan market voiced similar thoughts as they reported quarterly results in the last month.

At Fifth Third Bancorp Inc., the office sector “is one that we’re watching long term just given the structural changes in that space,” Richard Stein, the bank’s vice president and chief credit officer, said during a recent conference call to discuss the corporation’s quarterly results.

Likewise, PNC Bank Chairman, President and CEO Bill Demchak told investors that given the present trends in the office sector, he believes “we’re going to see that weakness in office properties flow through  over a longer period of time.”

“I think that’s going to cause lease rates to drop over time, and yes, I think that’s going to impact office properties, but we’re reserved for that (and) have been watching that,” Demchak said. “We pick our clients carefully, and at this point, we think most, if not all of them, have the wherewithal to make their way through that.”

A recent outlook from JLL Inc. stated overall office leasing activity in the Grand Rapids market “continues to be subdued, even as the pandemic subsides,” with stagnant rents since the end of last year.

An outlook from Advantage Commercial Real Estate said that 2022 “will be a telling year for the future of the office market given the shift in work from home trends, amenities offered to employees, flexibility in work schedule, and most importantly wages and bonuses.”

Still, the Advantage outlook states the office market is “still active and growing.”

Lenders today are looking to get a good understanding of the present trends in the office sector, Visser said. In the Grand Rapids area, “there are two different stories — what’s happening in the downtown market and the suburban market.”

“What we’re seeing is there’s been good activity in the suburban markets, and the activity in the downtown market is still lagging,” Visser said. “We have a lot of banks that are all looking to deploy capital, and they’re trying to understand risk. Most of that risk falls in understanding the guarantor, the borrower, but there is certainly a desire to understand what is the long-term trajectory for office.”

At Franklin Partners, “We’ve done well financing our office buildings,” despite some nervousness toward the sector, Shoemaker said.

“And we’re really doing it without a lot of difficulty,” he said, although loan requests for office transactions are taken “to the bankers that know us well and trust us as borrowers.” 

That’s a contrast to credit requests for industrial loans that the firm can shop around to lenders and “really take to the market because they’re so favorable” Shoemaker said.

Borrowers will go through 2022 and 2023 in a rising interest rate environment that will make credit more costly.

The Federal Open Market Committee last week raised the federal funds rate by a half percentage point, which came on the heels of a quarter-point increase in March. Lenders generally expect multiple interest rate increases this year and next.

PNC Bank, for instance, projects three quarter-point increases in the federal funds rate in June, September and December, with a half-point increase in July.

Higher interest rates could slow transactions later this year, particularly for investors, Visser said.

“It certainly puts pressure on what any individual can pay for a building if the cost of capital goes up, specifically on the investment side. It’s harder to pay a high dollar amount,” he said. 

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