It’s not easy for developers to receive commercial financing today. That’s the bad news. The good news? Banks are freeing up more dollars today for the right projects and the right borrowers. Midwest Real Estate News recently spoke to Bank of America’s Peter Malecek about the shifting nature of commercial real estate financing.
Midwest Market Executive for Commercial Real Estate Banking
Bank of America
A lending market that is more active: I would definitely say that commercial financing has loosened up from a year or two. A year or two ago we were in the trough. Banks had a lot of stress. They faced some serious capital issues. We didn’t know if the economy was in a freefall or if it had stabilized at the bottom. There is more confidence out there today.
Boosting that confidence: Of course, there are still some challenges out there relating to job growth and employment. If we saw more job growth, that would increase confidence even more. We’d also like to see what I call a steady, positive absorption trend. We’d like to see a history of positive absorption in whatever sector we are looking at, whether it’s industrial, retail or office.
Construction financing vs. refinance: There is more liquidity available for refinancing and portfolio acquisitions today. Construction-related debt is available, but there is not as much of that going on as there was a couple of years ago. There are no office buildings under construction in Chicago. There are very few retail projects under construction in the city right now. We are seeing a tremendous amount of apartments being built in the suburbs and downtown Chicago. The multi-family sector is certainly the favored asset class today.
The booming multi-family business: I haven’t seen any signs of a slowdown in multi-family. It has the lowest cap rate. It has the most consistent demand. There is a tie to the housing situation, certainly, and all the problems we’ve seen with single-family homes. But there is also consistent demand outside of that. Rents are continuing to trend upwards.
What developers need to show to get financing: The biggest challenge for developers remains market risk. What is your pre-leasing and what is the quality of the tenants who have pre-leased? There is not a lot of significant pre-leasing in office or retail today to allow for those projects to get developed and to get started. I would, though, expect that to change.
The change the industry needs: We need to see more absorption in these sectors and we need to see more job growth. If that happens, you’ll see more eventual development and more financing in these other sectors. I think the attractiveness of a particular Central Business District matters, too. In some CBDs, we are seeing significant suburban relocations to downtowns. Look at Chicago. Motorola Mobility has come to downtown Chicago from the suburbs. Earlier, Sara Lee moved its headquarters back to downtown Chicago. United Airlines is now moving to downtown Chicago. All three of these companies are significant job creators. They are significant new tenants to the downtown CBD. Then there is the significant tech demand. The younger employment base that is attracted to tech jobs often want to work in downtown CBDs. That’s where the jobs are going. These factors lead to job growth. If we see enough of that, it would then allow for development activity to grow to meet the need in downtown.
Consistent financing across the Midwest: There is pretty consistent loan demand in the Midwest markets outside of Chicago. The demand is pretty consistent in markets like Nashville, Kansas City, Cincinnati, Columbus or Minneapolis. We are seeing demand across all markets. This demand isn’t really for construction financing, though. There is some new construction in all of those markets, but we are seeing demand mostly for refinance and portfolio acquisition lending in our Midwest markets outside of Chicago.
— Dan Rafter