Industrial and multi-family residences remain the “darlings” of commercial real estate loans

LThe end of the commercial real estate sector remained strong throughout the first quarter, particularly for manufacturing and multi-family residential developments.

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

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

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

This is particularly the case for manufacturing and industrial spaces as well as the multi-family residential sector where demand remains high.

Advantage Commercial Real Estate released a report this month showing first quarter demand for warehousing, distribution and fulfillment centers “is at an all-time high in West Michigan with most likely the weakest available stock than the market has ever seen”.

For industrial, manufacturing or multi-family transactions, the banks are “pouring in the money,” said Don Shoemaker, partner and co-founder of a commercial real estate firm. Franklin Partners LLC.

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

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

Meanwhile, banks generally saw solid growth rates for commercial loans in the first quarter.

Stephen Steinour, Chairman, President and CEO of Huntington Bancshares Inc.Told MiBiz in a recent interview that a booming manufacturing sector remains a strong sector for commercial real estate lending.

“Industrial space, we can’t get enough right now. Literally there is a supply constraint there as well,” Steinour said.

During a recent visit to Grand Rapids, Steinour met with several large western Michigan commercial real estate developers who said they were “doing well,” he said.

Although some areas of commercial real estate are stronger than others, “overall I don’t think there’s a single segment of our market where lenders” are pulling back, although “they may examine it in more detail (and) they might have a broader price on it,” Visser said.

“Historically, West Michigan has been a fairly conservative market and we tend to be a bit more insulated from the volatility seen in other markets. This means we are a slow growing market and banks are ready to grow with us,” Visser said.

The office is getting closer

One segment that is under closer scrutiny today to better assess credit risk is that of offices and the effects that remote working has had on market demand.

“We don’t know what that office demand will be over time with the flexible workplace policies, but I think the economic growth we’re going to see will mop up that existing supply over time,” Steinour said. . “We look at it a little”

Executives from other major regional banks in the West Michigan market expressed similar thoughts when they released quarterly results last month.

To Fifth Third Bancorp Inc.the office sector “is a sector that we are watching for the long term given the structural changes in this space,” said Richard Stein, vice president and chief credit officer of the bank, during a recent conference call to discuss the the company’s quarterly results.

Likewise, NCP Bank Chairman, President and CEO Bill Demchak told investors that given the current trends in the office sector, he believes “we’re going to see this weakness in office buildings trickle down over a longer period. »

“I think that’s going to cause rental rates to come down over time, and yes, I think that’s going to have an impact on office properties, but we’re booked for that (and) have been monitoring that,” he said. said Demchak. “We select our clients carefully, and at this point we believe that most, if not all, of them have the means to get by.”

A recent perspective of JLL inc. said overall office leasing activity in the Grand Rapids market “continues to be subdued, even as the pandemic abates,” with rents flat since late last year.

A prospect from Advantage Commercial Real Estate said 2022 “will be an eye-opening year for the future of the office market given changing work-from-home trends, employee amenities, flexible work hours, work and, above all, wages and bonuses”.

Still, Advantage’s outlook says the office market is “still active and growing.”

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

At Franklin Partners, “we’ve financed our office properties well,” despite some nervousness about the sector, Shoemaker said.

“And we do it really without too much difficulty,” he said, although loan applications for office transactions are passed on “to bankers who know us well and trust us as borrowers.”

It’s a contrast to credit applications for industrial loans that the company can seek from lenders and “really take the market because they’re so supportive,” Shoemaker said.

Borrowers will navigate 2022 and 2023 in an environment of rising interest rates that will make credit more expensive.

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

PNC Bank, for example, is forecasting 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, especially for investors, Visser said.

“It certainly puts pressure on what any individual can pay for a building if the cost of capital increases, especially on the investment side. It is more difficult to pay a high amount,” he said.

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