Finance Midwest

Navigating the evolving world of commercial finance

Navigating the evolving world of commercial finance,ph01

The companies that provide commercial financing remain busy today, with developers, owners and buyers seeking the money they need to build warehouses, transform office buildings into apartment towers and add brand-new luxury apartments to urban skylines.

But even as financing requests keep streaming in, the companies considering these requests are seeing a change: Multifamily remains a hot asset class. But the industrial market? That asset class is even hotter.

Midwest Real Estate News recently spoke with the executives at two top commercial finance companies. They had plenty to say about what makes for a solid financing request, how busy they are today and how the commercial real estate market is evolving as the last third of 2018 rolls around.

Craig Kegg
Senior vice president, office manager
Grandbridge Real Estate Capital
Columbus, Ohio

The slowdown isn’t happening: We continue to see a large number of financing requests. Many thought that the up-tick in interest rates coupled with the refinance hangover would cause requests to surely slow down. But that has not been the case for us. Owners are still very much making acquisitions and exploring refinancing solutions.

We do continue to get requests for construction financing. However, we have seen that slow a little bit. The exception has been the industrial space. We still see a significant number of requests for construction financing in industrial.

Busy times in industrial: Industrial is the busiest area right now. That sector has become very big for us. I’d say 43 percent of our business to date this year has been in industrial. And we’re not alone. I hear from others that they, too, are experiencing an up-tick in industrial activity.

The reason for that in our market is partly because much of the industrial product here is older. There is a desire for new product. The logistics industry is playing a major factor in that. Then there’s the retail end of it, with Amazon and other ecommerce companies that need distribution space. They are driving a lot of the development and energy in the industrial space.

With the new technologies related to stacking and related to picking, the older buildings with the lower ceiling heights are becoming less desirable. Those older buildings don’t allow companies to create as many efficiencies. These newer buildings are much needed.

A dip in multifamily: Multifamily has definitely slowed for us. Being a full-service multifamily shop, with Fannie, Freddie, HUD and life insurance companies, historically multifamily had even before its run as the favored asset class always been a big part of our business. It typically made up 50 percent to 60 percent of our business. We have not seen that same type of velocity this year. Here in Columbus, our business is probably half of that year-to-date. It is definitely different today.

In the markets that we cover, a lot of the product is currently or has been developed. So the opportunities for new projects are maybe not as vast as what they were 24, 36 or 48 months ago. I also think there is a little bit of a shift from Class-A product to what I would call workforce product. That product, because of its price points, is a little tougher given the large run-up in construction costs that we are seeing. It’s not as profitable, from what I hear from our owner/operators and developers, to build that product given the costs associated with construction. It is causing them to rethink how they do business.

A greater focus on experience: When we are deciding on financing requests, we are more focused today on the experience of borrowers. Maybe you have a project that might have a B location versus an A location. But you also have a really strong sponsor with a long track record. We would be just as excited about that that opportunity as we would be about an A location. Experience is a big consideration today.

Eye toward the future: I expect business to continue to be robust. This is a business that we thought for many months would be affected by rising interest rates. We saw a little bit of that pause in the late spring or early summer. That has since changed. People seem to be more comfortable with where rates are. I expect the balance of 2018 and the first part of 2019 to continue to be very good.

Actually, construction costs are more of a challenge today than are interest rates. Many of our clients have walked away from opportunities or put opportunities on the shelf because construction costs are too prohibitive.

James Cope
Executive vice president and managing director
Walker & Dunlop

Active markets: The markets are very active, from refinance to acquisitions. The markets are fully functioning and as active as ever. It was a little slow in the first half of the year, but then activity picked up. Now it is what we consider an active market again.

Multifamily still busy: The asset class in which we see the most requests remains multifamily. It has always been our propensity to do a lot of multifamily business. Of course, we are still active in all other asset classes, too. Multifamily, though, is leading the pack in terms of the concentration of business.

The commercial real estate markets, though, in general remain quite stable today. New construction and new deliveries are still pretty strong. We expect this to remain strong in the next couple of years, too. Deliveries are projected to be lower in 2019 than they will be in 2018. But even with that drop, the markets should remain quite healthy. You will have some short-term fluctuation, but overall, the markets are still in good balance. If there is a major disrupter, of course, things can change. Barring that, the markets should continue to be healthy.

The power of industrial: Generally, there is never enough industrial product out there. Most capital sources would love to see more of it. That is an asset class that is very strong. There is a lot of demand for it from the capital side. There just isn’t the level of supply to meet that demand. The demand is well exceeding the supply that is available in the industrial space.

The industrial markets are still very tight. We don’t see that changing anytime soon. As long as the overall economy continues on the path it is on, we should see the industrial market continue to thrive.

Fundamentals matter: When we consider financing requests, we look carefully at the quality of the asset. The age of the asset is not a concern for us. There are lenders that will lend into a 30-year-old or a 40-year-old project. It’s really the fundamentals and strength of the tenancy that matters. If you have a large single tenant with weak credit, that might give us pause. If you have a multi-tenant project with a good core of tenants and a diversified rent roll, that makes for an attractive project, even if the building is an older one. It then just becomes about figuring out what leverage point is appropriate. It’s not that people won’t finance it. It’s just about at what leverage point.