CRE Midwest

TCF Bank's Kelly: Developers can't just build apartments anywhere anymore

Interview with TCF Bank Kelly,ph01

As president of commercial banking in the Minneapolis office of TCF Bank, Patricia Kelly knows just how strong the commercial real estate market remains today. She also understands how the different commercial sectors are evolving. The financing requests TCF Bank receives offer evidence of office and multifamily sectors that are experiencing big changes.

Midwest Real Estate News recently spoke with Kelly about the state of commercial financing and the steady flow of business TCF Bank is seeing. Here’s some of what she had to say.

Quality deals matter: We still see a healthy market. Last year, construction costs were rising. It was a competitive lending market. Margins became compressed. So far in 2019, we have seen some early signs of construction costs stabilizing. Our clients tell us land costs, though, are still elevated. That means some possible new developments don’t pencil out. The deals that come to us are quality deals. I attribute that to the quality of the sponsors that we do business with. They have the discipline to pick the right projects that make sense in the market today.

Focusing on the people: We look at a lot of factors when looking at requests for financing. We focus on our sponsors and their goals and business plans. We have prior relationships with some of our sponsors that sometimes go back decades. Our clients are generally cautious as they try to anticipate what changes might be happening in the future with the real estate landscape.

We’re fortunate in that we have one of the best bank treasurers and economists at TCF. He advises our board and executive team on rates, capital flows and the other elements of the economy. We marry our underwriting to his view.

Today, we see general stability in the long-term interest rates. What we need to pay attention to continually is supply and demand in the various markets in which a building might be built.

The right project: When we look at the projects themselves, we consider several factors. We start with the business plan that the sponsor has for the asset. What is its intended purpose? What is the demand for the space on which the project is being built or repositioned? We tend to finance sponsors who understand the benefit of providing more equity into transactions. It gives them greater flexibility and increases the chance for success of the project.

Wide variety: We provide financing for all real estate asset classes. We are finding that multifamily today is prevalent. But we are very granular when it comes to individual locations. We prefer projects that are in the first ring of the CBD, not in the center of the CBD. We focus more on mid-rise and mixed-use projects. We aren’t seeing new office construction, but we do see office repositions. Industrial is very strong. And healthcare is an important sector for us, too. Hospitality has been solid. We aren’t seeing many retail deals. Retail is in transition today. We do finance mixed-use projects, residential with retail on the ground floor in more of an urban, walkable setting. But we don’t finance much freestanding retail right now.

An evolving office market: We are seeing requests for financing for both adaptive reuse and simpler purchases and sales in the office market. Sometimes an institutional owner might have an office property that it has held onto for five or seven years, the fund is starting to liquidate so it is time to realize the value of that investment. So some of the requests we receive are a result of the natural transition of ownership. Some requests, though, are because owners want to reposition their office property. That can go from a gut rehab to redoing the lobby and some mechanicals. It runs the gamut.

Changes coming to multifamily? When we look at multifamily, we do look closely at each individual market. Each market is different. We also look at where in the market a particular asset is located. But gone are the days when you could build a multifamily project anywhere and it would fill up. Now it has to be the right project in the right location. There is softness in spots. But I don’t see a cliff in the multifamily market.