Greg Warsek, senior vice president and senior regional manager for the Chicago market at Associated Bank, is a veteran of the business of commercial financing. When he looks at today’s commercial real estate market, he sees improving fundamentals and increasing activity. He also sees more banks willing to finance more projects, all of which is good news for commercial developers.
Midwest Real Estate News: In general, is it easier for developers today to get financing for their commercial projects? Greg Warsek: I would say that because the market is starting to firm up, that, yes, it is. Over the last year or two, we’ve seen more market-rate leases occurring. These leases are creating better comps for the appraisals. It wasn’t that long ago that a large percentage of the properties that appraisers were working on were story – buildings that came with a story that tried to boost their value – or distressed developments. That lowered appraised values across the board. Now, as the commercial real estate market firms up and people are getting back in real estate, there is better data out there for new lending. I would say, then, that the answer to your question is ‘yes.’ It is getting easier to get commercial real estate loans. To me, the biggest component of this is the fact that the market itself is getting stronger.
MWREN: The overall health of the economy and the real estate market certainly play a big role in commercial lending. Warsek: Not only can appraisers today get better values, they have leasing rates and cap rates that are supported by market-rate sales. We, the banks, have better data. At the same time, we are seeing some trends that suggest that there is a certain amount of shortage of new space out there. That allows us to take on more market risk. The developers, too, can take on more market risk. That has a big impact.
MWREN: What other trends are you seeing? Warsek: We are starting to finance spec industrial properties again. We are seeing certain submarkts that supporter either new spec construction or loans for real estate developers that are buying industrial buildings with tenants with short-term leases or leases where the tenants are going to move out. That’s important, too, for increasing the value of buildings. Those tenants who rented during the slow times have been paying low rents. We’re seeing developers buying these properties as these leases are maturing and the tenants are moving out. This increases the buyers’ potential to earn income. They can rent out these vacated spaces for higher rents. Now that the market has started to firm up, we are seeing some good leasing activity out there. The brokers are telling us that they are working with a lot of tenants who are looking for space. It’s easier for us to underwrite the market risk today.
MWREN: Has the improving market changed the requirements that developers need to meet to qualify for financing? Warsek: A year or so ago, you needed to have tenants in place to qualify for a loan. If you didn’t have that, that deal was hard to do. We’d want to know if the property was 100-percent leased. Now that the market is getting stronger, we are more flexible with that. We are still requiring borrowers to meet certain criteria, though.
MWREN: What do you look for when making lending decisions? Warsek: One, do the borrowers have experience in this type of real estate? If they come to us with retail, industrial or apartment projects, we make sure they lay out their history of developing similar projects. There are a lot of different risks to look at when providing commercial financing. One of the risks we look at is what is called execution risk. A lot of developers learn a lot on their first, second and third projects. By the time they get to their fourth projects, they avoid many of their earlier mistakes. Those experienced guys are the ones you want to make bank with. They’ve made their mistakes and aren’t going to make them again. The execution risk is lower.
MWREN: What else do you look at? Warsek: We also look at their character. That’s easier to do today. You can see how borrowers performed when things were at their worst. Did they work through their problems in an honorable way? Did they give property back or did they work out different solutions? It’s easier to ascertain character, who are the high-character people who you know will pay you back, after tougher times.
MWREN: You look at borrowers’ financials, too? Warsek: That’s the third part, the financial capacity of the guarantors, the people behind the project, to pay back the loan. Are they strong from a liquidity standpoint, from a global cash-flow standpoint? When people come in for loans, they have to sell themselves as much as the real estate. They have to sell their experience, their references, their detailed finances. When we first started asking for this, people complained. But I always tell them to think about how much information they have to provide when applying for a mortgage loan for their own houses. They have to provide a lot of paperwork, and that’s for a loan that’s far smaller than a commercial loan. When I bring that up, that usually convinces them pretty fast that we’re not asking for too much.