As chief banking officer with St. Louis Park, Minnesota-based Bridgewater Bank, Nick Place has seen the slowdown in commercial financing requests that has resulted from high interest rates and soaring construction costs.
But in the early months of 2025? Place is seeing an increase in commercial financing requests from both investors and developers. And he predicts that the number of these requests will continue to rise as the year progresses.
We spoke with Place about the state of commercial real estate financing. Here is some of what he had to say.
Are you seeing an increase in commercial financing requests so far this year when compared to last year? If so, what are some of the factors behind that increase?
Nick Place: We are seeing an uptick in activity compared to this time last year. In the fall of 2024, we saw some Fed interest-rate cuts that lowered the short end of the yield curve. Then with the election, we did see a shift in optimism around what the economy could potentially look like over the next handful of years. Those two things coupled together have ushed some folks off the sideline and into the game a bit.
We also continue to see loans that have been put in place in 2020 and 2021 that are coming up for maturity. Maybe someone purchased a property with a five-year loan in 2020. They were probably not inclined to do anything with that loan over the last couple of years. But now as that loan matures and resets, they might be inclined to sell out of it. Or they might look to refinance it with another bank. That maturity or rate reset will cause an owner or partnership to make a decision about what do with that asset. Some of that is driving loan activity.
Nick Place, Chief Banking Officer, Bridgewater Bank
Can you talk a bit more about the increased optimism you are seeing among developers and investors?
Place: During the last couple of years as the Fed was hiking rates, people were wondering if we were going to end up in a recession. But now we are looking at what is happening and wondering if this Is that soft landing that no one expected to happen. Maybe the Fed actually did this right and we are going to have a soft landing here. That drives some optimism. Investors don’t have to worry that they’ll buy property or start a development project and run right into a recession.
What kind of financing requests are you seeing most frequently? Are financing requests from investors looking to purchase multifamily or industrial properties the most popular requests today?
Place: It is across the spectrum of asset classes. There is a lot of activity with multifamily. In that market, the leases on transactions are relatively short, 12 months or so. Owners can turn those rent rolls over quicker than they can with a retail building. We are also seeing quite a bit of financing requests in the industrial space. The industrial market in the Twin Cities is still doing well. Some submarkets have more vacancies than others, but that segment continues to do well.
We have also served a large niche within the affordable housing space for quite some time. That market is counter cyclical. If market-rate multifamily activity slows, that helps with construction pricing because contractors aren’t so busy. That can help make affordable developments pencil out a bit easier. We work with national developers of affordable housing. It’s a consistent pipeline of transactions for us. We have seen a big pick-up in the affordable-housing pipeline over the last 12 months or so.
I know that new construction activity has slowed. Are you seeing any pick-up in financing requests for new developments?
Place: New requests within the construction industry ground to a halt through 2023 and the first half of 2024. We saw a pick-up in the back half of2024. A lot of those loans are financed with floating rates. As the Fed cut rates, it made those variable rates more attractive. If you think about optimism, that does impact construction activity quite a bit. If folks don’t feel that they would be delivering a property into a good economy, then they are not interested in starting one. The increase in optimism has helped.
We have provided financing for clients who are working on new construction industrial properties. The same is true with multifamily. We have approved financing for the development of a more boutique Class-A apartment all the way down to affordable properties.
What are some of the factors keeping the demand for multifamily properties so high?
Place: The inventory of single-family homes is still as low as it has ever been. People who have low-interest-rate mortgages are keeping their homes longer. The single-family market is doing well. But developers are not building as much single-family housing, and certainly not enough to absorb the household formation needs.
Multifamily has typically been the way in which the demand for single-family homes has been absorbed elsewhere. We are also seeing a shift in what the renter population looks like. Renting is not thought of as a bad thing today. A lot of people choose to rent as a choice versus a need. As the population continues to age, we will continue to see people selling homes. They don’t need a mortgage. Instead, they will rent.
There are a lot of tailwinds pushing multifamily development forward. The biggest headwind facing multifamily development continues to be the interest rate environment. There is also the inflation pressure we have seen on construction costs like lumber and HVAC systems and labor costs. Those are all up from five years ago. It takes time for owners to pass on those development costs to residents.
Are you seeing any relief from rising construction costs?
Place: I’ve always said it’s like a game of whack-a-mole. You solve one problem, some supply chain constraint, and something else pops up, like the threat of tariffs on Canadian lumber. Constructions costs have stabilized. But I don’t think we will see a meaningful deflation in the costs of construction.
What can borrowers do as the loans they once took out at lower interest rates come due today and they face far higher rates?
Place: There is not a single answer or silver bullet. Every borrower and transaction is different. We advise our clients to look at their income and expense statement line by line, to leave no stone unturned. Is there a way to increase or improve the revenue collection on a building? Can they go line by line on the expense side to find cost savings?
People are bidding out and shopping for better insurance pricing. They are adding low-flow stoppers to their unit’s toilets to save on water costs. They are taking all these steps to absorb the higher interest rates they face.
We are also seeing some folks deciding to sell the asset. Their basis is low enough. They won’t get the price they would have gotten three or four years ago, but they’ll still do fine with the sale. They’d rather sell and move on to something else.
We start conversations with borrowers well in advance of a rate reset, reaching out to them 12 months or more in advance. How can we solve this problem now? If we have a 3.5% interest rate today and 12 more months left on the term, we can do a blend-and-extend. We can set up a new four-year loan and blend the rates tother somewhere in the 5% range. That’s a rate that you can manage.
What factors do you consider when you get a financing request?
Place: We have been active in the real estate space since our founding. We know what works and what doesn’t. We are 100% a relationship bank. We focus on who our borrower is. That is the first thing we talk about in our credit-review process. Ultimately, we lend people money. People repay our loans. If we make good people decisions, the rest of it falls in line.
It is impossible to predict the future. But if we make the right people decisions, if we work with people who are resourceful, hard-working and proactive in solving problems, we are confident that our loans will be repaid. They are the ones who will be successful.
