Finance N Illinois

Associated Bank: Opening a universe of possibilities with new REIT division

Greg Warsek

Associated Bank has long been active in the Middle Market space in the Midwest. But the bank's leaders had bigger plans: They wanted to expand into the corporate real estate space. And to do that, Associated Bank would have to build a new national REIT division.

Associated Bank has long been active in the Middle Market space in the Midwest. But the bank's leaders had bigger plans: They wanted to expand into the corporate real estate space. And to do that, Associated Bank would have to build a new national REIT division.

Associated Bank did this starting in September of last year, bringing in Mike Sedivy, senior vice president, and Greg Conner, vice president, to head the company's National REIT Group. Both report to Greg Warsek, senior vice president and senior regional manager for the Chicago market, in Associated Bank's commercial real estate headquarters in Chicago.

Midwest Real Estate News recently spoke to Warsek, Sedivy and Conner about their plans for Associated Bank's new REIT group and why the time was right for the bank to start this new division.

Midwest Real Estate News: Why was this the right time to start a national REIT division? Greg Warsek: In the time that I’ve been with the bank, Associated Bank has been focused on Middle Market lending. Breck Hanson (executive vice president and head of commercial real estate) took over about four years ago. We continued as a Middle Market project lender, but Breck has aspirations to grow the company into more than what it is today. One of the goals that we had on our whiteboard for a while was to grow into the institutional space, to build a REIT platform. The question was, when do we pull the trigger?

We decided in 2013 to move forward. If we hired the right people, we knew we could be competitive. Our bank’s size and the projected holds we were looking for were already competitive. Under Breck’s leadership, we’ve done a terrific job of executing in the Middle Market space. We wanted to build out the bank’s commercial real estate business to be more of a full-service bank. We wanted to have solutions for real estate investment funds. We wanted to go after a lot of the REITs that were active in our markets, too. The key to specialty lending is hiring the right people. We’ve done that with Mike and Greg. They give us the internal and external credibility that we need.

MREN: This question is for Mike and Greg Conner: Why did you make the move to Associated Bank to work on this project? Mike Sedivy: It was attractive to be part of a new team, a new initiative. It was attractive to be part of building a business. To be part of an institution that is growing a new business effort is an interesting challenge. I’m looking to forward to helping the division grow both in our existing footprint and nationally, too. Greg Conner: I echo Mike’s statements about building a business from the ground up. Associated Bank seems like a very entrepreneurial place. That is attractive, too. There is something interesting about starting from the ground up to fill out a portfolio. So far, it’s been very rewarding.

MREN: What advantages does having a dedicated REIT team bring to Associated Bank? Warsek: I list expertise as being the number-one reason for creating a dedicated team. We could have said to our existing officers, go ahead and go after the REIT business. But the reality is, you have to approach that market in a consistent manner. It is a unique market. There are certain elements in terms of market information that are important to understand. You have to consider a different set of analytics than when doing project lending. Having a dedicated team gives us credibility as we go after this market. It also gives us the market knowledge we need to grow in this space.

Mike and Greg are dedicated to this space. When you hire people, you are also bringing over their rolodexes. They have brought their past relationships that they have developed over time to us. Sedivy: The REIT banking universe is remarkably small. Generally, the people in it have been working together for a long period of time. When we go to bank meetings, it is often the same list of attendees. We all know each other. We know what all the hot buttons are. We have all worked together in the past. Initially, people in our field didn’t know much about Associated Bank. But they know us. After we delivered on our first few deals, it legitimized Associated Bank in this space. It opens up a whole new universe of opportunities for Associated Bank.

Conner: REIT banking is a relationship business. It’s important to have those relationships. When you have those, you can steadily build a business. That is what we are doing here.

MREN: Forming a new division is a challenge. What is your goal for the REIT division? Warsek: We expect this division to be a billion-dollar business by the end of 2015. It is a goal that I think is achievable by the end of this year. That would be a significant achievement for us. We are on track to do that.

MREN: What types of properties today are the most attractive to REITs? Warsek: It’s no secret that multi-family and industrial properties continue to be the most attractive investments today. But the number-three category is now retail. We have seen a lot of strong project financing opportunities in the retail space. Much of the retail space is very well-structured with not a lot of market risk. That sector is attractive today to REITs, too.

Office has been soft since the downturn. We just started to see a little bit more activity at the end of 2014. There have been other product types that have been really steady and that have withstood the downturn well, self-storage and medical office space. Right through the downturn, we saw those product types continue to perform well. Borrowers in those spaces fared well and have been active.

MREN: How does the REIT team determine which REITs are the best ones to lend to? Sedivy: What we are looking for is a strong balance sheet with an attractive pool of underlying assets that are geographically diverse. We are working with people we have worked with in the past. We are working with people who have a track record of performance, known entities with strong portfolios and balance sheets. There is not a tremendous amount of market risk in the financing that we are doing.

MREN: How strong do you think the commercial real estate market in Chicago and across the Midwest will be in 2015? Warsek: The commercial real estate market is stable. We have seen a decent economic recovery. We try to be optimistic in commercial real estate lending, but you are always wondering if the next cycle isn’t just down the road. You have to look at global factors and how they will ripple out. It is difficult to make predictions because there is so much uncertainty across the globe. At the end of the day, it is job growth and unemployment that drives real estate locally. What keeps me up at night? I wonder what impact rising interest rates will have on loan demand. Until you stress the portfolio, you are not sure what the impact will be on loan demand. Sedivy: The Midwest and Illinois have probably lagged the rest of the country a bit in terms of the recovery. But we also see a more stable real estate environment in the Midwest. We don’t see as many hot and cold cycles as they do in the coastal markets. Money tends to slosh in and out of those markets more rapidly than it does in the Midwest. The variability here is not as high as it is in other parts of the country. And that is a positive when you are building a new platform.