Finance Midwest

Associated Bank's Warsek: CRE strong, but evolving, in 2019

Associated Bank's Warsek: CRE strong, but evolving, in 2019,ph01
Expect plenty of financing requests for office renovation projects in 2019.

Commercial lenders can tell when the commercial real estate market is hot and when it’s heading for a slowdown. And 2019? Greg Warsek, senior vice president and senior regional manager in the Chicago office of Associated Bank, told Midwest Real Estate News that this year should be another strong one when it comes to financing requests and commercial sales and development activity.

But 2019 will also see changes. The apartment market, for instance, remains strong, but might be seeing some softness in certain parts of the Midwest. New office construction isn’t in demand, but renovating older office space? That is a strong source of activity.

Here’s some of what Warsek told us during a recent interview. Read on for an insider’s look at the state of the commercial real estate market in 2019.

Boom time? It is very busy right now. There is usually some seasonality to the financing requests we see coming from the commercial real estate people. The fall has traditionally been busy, while the fourth quarter tends to be slower. But this year we saw an acceleration in the fourth quarter leading into 2019. I had never been busier in a fourth quarter than I was last year.

Throughout the Midwest, Associated Bank saw $2.3 billion in new loan production last year. In 2017 in the Midwest, Associated Bank saw $1.8 billion in loan production. It was almost a 30 percent increase year-over-year.

Expecting a good 2019: We expect a similar market in 2019. We had a really good year in 2018. Near as we can tell, we expect a very similar year in 2019. I would call it steady. Business won’t necessarily be growing, but it wouldn’t surprise me if we did see even more business this year.

I have been trying to figure out what happened in the fourth quarter last year, why we were so busy. Broadly speaking, some lenders beyond just banks – debt funds, permanent funding sources, life insurance companies, agency lenders, CMBS lenders – sometimes fill up their allocations in the third quarter. Things start to tighten in the fourth quarter, and that creates increased demand. I’m not sure if that’s what happened. But it is one possible explanation. I’m happy that we were so busy in the fourth quarter, but I don’t necessarily have a good answer for why we were.

Multifamily still hot: The multifamily sector is still a popular source for financing requests. The majority of apartment projects we have funded are leasing up quickly. It still seems like there’s a good balance of supply and demand throughout the Midwest. There are pockets of concern where there has been some overbuilding. But there aren’t many of those.

There was some concern that developers were building too many apartments in downtown. But that hasn’t turned out to be the case. Everything that was built was absorbed. A lot has to do with the job growth that is occurring in Chicago. There has been a fair amount of high-paying jobs added to the Chicago economy. That has brought in more people. There’s been a pent-up demand for all those new apartments.

Downtowns attracting plenty of renters: We are seeing a lot of demand for multifamily in the downtowns of cities across the Midwest. We are seeing an increase in the number of empty-nesters who are downsizing out of homes and into apartments instead of condos or smaller homes. A lot of companies are moving to downtowns to attract the talent that wants to live in the center of a city. That is driving a lot of the growth that is going on in the multifamily market.

People first: When looking at financing requests, we always look at the people first. We look at their character and their capacity. Do they have a track record in a particular asset class? In commercial real estate, a lot of developers tend to be specialists in one or two asset classes. We like to see that. That is something we look at very closely. We want to see a track record of completing similar-sized projects, whether apartments, retail, industrial or whatever it is. The people are what we focus on.

From the project perspective, we consider whether the project itself is well thought out. Is it capitalized the right way? Leverage is still pretty low these days with most of the projects we see. A lot of that is driven by borrowers who remember the Great Recession and prefer lower leverage on deals. There is a lot more discipline in the system than there was before.

The power of industrial: Industrial is solidly our number-two most active asset class behind multifamily. It is very strong, and 50 percent to 75 percent of what we are seeing is spec construction. In the industrial space, spec is common. A lot of users tend to not be ready to make a leasing commitment until a couple months prior to their lease expiration. So we see a fair amount of spec industrial construction.

We are seeing historically low vacancy levels in the industrial sector in our Midwest markets. Of all the areas in which to do construction, industrial is one of the safest. There is just such a short time frame with these projects. Generally, it takes no more than nine to 12 months to complete an industrial project. You can move it through the process quickly. Other bigger projects can take two years or more to get built. A lot can happen during that time frame. With industrial, you can be leased up by the end of the year. It makes that sector very attractive.