Midwest Real Estate News spoke with Paul Schmidt, Associated Bank’s head of commercial real estate, about what it takes for investors and developers to qualify for commercial financing today. The key, Schmidt says, is the people behind the financing requests.
Midwest Real Estate News: For years now, the multifamily sector has been red hot. Are you still seeing an abundance of financing requests from customers looking to buy or build apartment buildings throughout the Midwest?Paul Schmidt: We are still seeing a lot of requests for multifamily financing. We really hit the peak about a year ago. Back then, it seemed that was all we were looking at. It has started to slow a bit, though. In a lot of the markets, the low-hanging fruit has already been developed. Developers and investors are now being a bit more selective. That said, the multifamily market continues to be strong. The market fundamentals continue to be strong in terms of the number of people wanting to rent versus buy. The country is seeing solid job growth. We have to find places for all these people to live, and renting remains a top choice for many.
MREN: You mentioned that a year ago, it seemed that the vast majority of your lending requests were for multifamily, but that this has changed today. In addition to multifamily, what type of building developments and acquisitions are borrowers looking to finance?Schmidt: On the construction side we are seeing some industrial financing requests, particularly for bulk warehouse-type opportunities. A lot of big users are consolidating their warehouse space. We are also seeing a number of financing requests for build-to-suit office opportunities. These properties fill a specific need. Companies don’t want to own a building. They want to lease it, but they are looking for a build-to-suit opportunity so that the building is designed specifically for their company. We are getting some requests for financing for retail construction, too. But these requests are usually for infill locations, for the redevelopment of existing properties as opposed to brand-new big-box retail.
MREN: What about on the income-producing side? What kind of financing requests are you getting when it comes to acquisition and repositioning loans?Schmidt: Where we are seeing a lot of activity is from the loans that were financed through the CMBS market back in 2005, 2006 and 2007. Typically, those CMBS loans had a 10-year term. Those loans are maturing today. If you went back and looked at the CMBS industry, those were some of the biggest years for that kind of lending. We are talking billions and billions of dollars of CMBS loans. The nature of those loans is such that all you can do with them is put them to bed. You make the payments. You can’t do anything else until they mature. Well, they are maturing now. We are seeing some opportunities to reposition properties that have come off the CMBS rolls.
MREN: What are some of the factors you look at when deciding which financing requests to approve?Schmidt: One of the most important things is to look at the people. What is their track record with this particular type of property? You want someone who has done this several times before. You don’t want someone who is learning the basics of a certain property type for the first time. You want someone with a long track record in that particular type of property.
MREN: What else do you look at?Schmidt: It is meaningful to us to see how they performed during the last downturn. A lot of developers had problems because the market dropped so fast. Most developers had problems. If they were in the middle of developing a property and trying to lease it up in the middle of the downturn, chances are it didn’t go according to plan. That is OK. But we want to make sure that they behaved properly and were cooperative, that they did what was needed to get through that cycle. We want to make sure that they took care of their obligation with the banks.
MREN: How about the real estate itself? What do you look at when it comes to the actual property being acquired or repositioned or the project being developed?Schmidt: We have to be comfortable that the real estate makes sense. We want to make sure, for example, that an apartment in this location makes sense based on how other apartments have leased up, based on what the demand in the area is. We look hard at the real estate. Then when it comes to construction loans, we look at who the contractor is. That’s pretty important to us. Does this contractor have experience building this type of property? Have they been around for a while?
MREN: What type of property and location combinations make for safe loans, in your opinion?Schmidt: Well-located apartments are still very strong bets. Apartments in strong markets where there is still a lot of demand make sense to us. There are some good opportunities in the industrial market, too. There is some consolidation going on in the industrial market today. Some companies are consolidating several of their warehouses into larger spaces. Properties that make sense in that sector are those located close to freeways. It’s all about travel to various parts of the country. As a result, a lot of our industrial lending is being done in the Midwest today. Indianapolis, Columbus and Chicago are all great industrial markets for nationwide businesses. They can locate close to freeways and get to the north, south, east and west in a short amount of time.
MREN: Speaking of the industrial market, why do you think this commercial sector is performing so well today?Schmidt: One of the big factors is online commerce. A lot of that online merchandise is distributed through warehouses, through big, huge distribution facilities as opposed to retail locations. Your Amazons and Targets and Costcos are investing in big distribution warehouse facilities to handle their huge online businesses.