Paul Schmidt is a veteran of the commercial finance business. And as executive vice president and head of commercial real estate based in the Minneapolis office of Associated Bank, he knows the market in the Midwest.
What does he see today? Financing requests remain steady, meaning that commercial real estate activity is the same. But the business isn’t quite as busy as it was just a year or two ago.
And when it comes to the financing requests Associated Bank sees? To no one’s surprise, multifamily and industrial are leading the way.
Financing requests remain steady: I wouldn’t classify the pace of financing requests we are receiving as particularly strong in comparison to recent years. It has been steady. It’s just not as strong as it was a year or two years ago. I don’t know exactly why that is.
You can speculate, of course. There has been some caution on the part of our customers. There had been quite a boom in terms of new apartment buildings being built. A lot of that new building stock has already been developed. There aren’t quite as many opportunities as there were when there was all that pent-up demand out there.
But the flow of financing requests is still steady, overall. It’s not at the torrid pace of a year-and-a-half ago, but the requests are still there.
Multifamily, industrial lead the way: We are still seeing plenty of requests for multifamily financing, whether it is new construction or the refinancing of an existing project. Sometimes owners want to reposition an existing building, make some improvements to it. The management might have changed and the new management wants to improve the operations of that building. The greatest percentage of financing requests we are seeing, then, is still for multifamily.
But we are also seeing more requests for financing for industrial product today. The industrial market remains extremely hot. There are a lot of industrial deals out there. Of course, much of that is because of the rise of ecommerce. So many online retailers need distribution facilities. There is a definite boom in that side of the business.
Experience matters: When looking at financing requests, we look carefully at the experience of the borrowers. We want to work with people who are experienced working with that type of property, who have an established track record. Have they gone through an economic downturn? And if so, how did they manage that? That is a big barometer for us. We want to work with experienced people who do this all day, not people who do this in addition to something else.
Location, location, location: Secondly, really good real estate is more important now than ever. We want to finance projects that have a very strong location, whatever type of property it is. We want it to get strong traffic. If it is a residential project, we want it to be in a desirable place in which to live.
That important edge: Does a property have a competitive edge? There are a lot of commercial real estate projects out there. What is this property’s competitive edge? Does it have better amenities? Is it a better value? Can you walk to retail? Is it close to freeways if it is an industrial building? What is its competitive edge? We focus on that, too, when looking at financing requests.
When we look at financing requests, we look at the demographics of an area, too. If it is a residential request, where are the job creators in that marketplace? How have rents performed over the past several years? These are factors that all go into determining whether a property is an example of what we would consider good real estate.
The structure of the deal: Of course, we also look closely at the actual loan structure. How much equity are in projects? What is the loan-to-value ratio? Are there any guarantees? What are the loan covenants? Those are all factors that we consider when deciding which requests to approve.
A competitive market: One thing we have noticed recently is a pretty significant increase in competition, particularly from non-bank lenders. There has been an increase in competition from insurance companies and private debt funds. A year or two years ago, there wasn’t quite as much of this kind of competition. That is where we take a closer look at the loan structure. We are not going to compete against what we feel is an unacceptable loan structure for us. Someone else might be willing to do it, but we are not.
I think the increase in competition stems from all the capital out there. Commercial real estate is a pretty desirable asset class. Organizations like to be involved in it. You get a lot of companies chasing capital, whether it is banks or non-banks. There is still a solid yield in commercial real estate compared to the alternatives.