Finance Midwest

Where renters seek apartments, investors see money signs

The commercial finance sector has had no issue lending to commercial real estate this year. Financing is very active today, according to finance professionals.

The commercial finance sector has had no issue lending to commercial real estate this year. Financing is very active today, according to finance professionals.

Due to the strength in the local multifamily market and continued positive outlook in rental fundamentals, many clients are focused on fixed rate financing due to the relatively low rate environment today, according to Dave Fetter, senior manager at Chase Commercial Term Lending.

He said that most of Chase’s requests have been for its five and seven-year fixed rate/hybrid product. Fetter said many requests are looking for longer term fixed rate quotes due to the continued relatively low interest rates.

“However, we are also starting to see a slight increase in the variable rate product to use today’s very low floating rates for either portfolio yield enhancement or property repositioning on specific assets,” Fetter added.

Adam Klingher, managing Director at Pillar, said Pillar’s financing requests are largely for refinancing of most existing loans within multifamily, but they also do a fair share of purchase loans.

Jerry Rotunno, senior vice president at Associated Bank, said their financing requests are project finance loans—loans to construct to completion and occupancy. He said requests are also for projects that are built and renovated, and loans on fully completed projects that they want to hold on to a property for some years.

“Construction financing is the leading request and it’s central to what banks do,” he said.

As for product types generating the most requests, Rotunno said there are three— apartments, office buildings, and self-storage all in the city, and they are all driven by the same costs.

He explained that in apartments, there is a new ordinance for Transit Oriented Development (TOD), as it allows more density for locations that are near CTA stops.

“What’s driving this, especially Milwaukee Avenue, is the interest in young people living along Milwaukee since that’s where new jobs are being created and it's accessible by transit and bicycle,” Rotunno added.

There’s also been a demand to convert old factories and warehouses into loft office buildings, which is driven by the same trend of people and companies wanting to be downtown. Rotunno said this has been occurring in the River North neighborhood, around Goose Island, and also the West Loop. He said this is to accommodate newer and growing companies that want amenities, which include catered lunches for employees, bicycle parking and rooftop decks, preferably with a skyline view.

The final demand that Rotunno addressed is that for self-storage. He said empty-nesters and younger people are moving downtown, and while apartments and condos are getting more and more expensive, developers are making smaller units to offset the development and that results in the tenants in the apartments needing storage space outside the building.

Overall, multifamily is experiencing its third year in a row at record financing levels, given the continued multifamily rent growth and abundance of debt and equity capital. This is expected to continue for the next year or two, according to Klingher.

As for the commercial finance industry as a whole, Fetter said it has seen a surge in business with many shops at peak production levels compared to previous years, due to a number of factors—continued strong fundamentals in the industry, the continued low interest rate environment, increased sales activity, abundant capital, and a growing debt maturity scenario through the next several years.

But when we look at how it was five years ago, the business was pretty much dead. Rotunno said there weren’t any transitions going on. Looking ahead in the next 12 months, he added that they all expect to be very busy.

Klingher believes the market will continue to stay active, and if anything, it may be affected by increases in interest rates, however, not in a significant way.

“Rates are still very attractive, even though they may go up a little bit,” he said.

And Rotunno also sees this as a possibility. He said the trend of moving to the city will result in the demand for construction loans to grow as more and more people move. One of the things to consider, he noted, is that it could be slowed by the increase in interest rates, as Klingher mentioned. An additional thing to consider is that the cost of living in the city will increase to landlords as well as to those moving downtown.

“Everyone’s pretty sure that property taxes are going to increase overtime at a pace greater than inflation,” he said. “That could make the city more expensive relative to suburbs, and that will have an effect on demand—we just don’t know what yet.”

Looking ahead, many are predicting an increase in financing activity.

This will be due to the growing CMBS, Fannie Mae, and Freddie Mac debt maturity scenario through the next several years, according to Fetter.

“We continue to be in a favorable rate environment; however, the general consensus in the market is that rates might start rising gradually, so if people see rates tick-up, that might spur some borrowers to take action who have been sitting on the fence,” he said.

What Rotunno sees for the remainder of the year is the same that happens every year—a rush from now until October to get construction loans approved and closed so work can begin before the ground freezes. He said everything has to get started soon and once Labor Day is over, there will be a rush to get projects building foundations and moving dirt so they can continue through winter.