December 14, 2018
Alliant Credit Union’s Charles Krawitz, Vice President and Head of Commercial Lending, shares insights about the lending market, financing considerations and the top performing markets across the country. Check out his thoughts about those topics and more in our latest CRE Q&A.
Q: Let’s talk about the market. The numbers are saying one thing and the mood is saying another. What do you think about the financing market right now?
A: Commercial real estate lending has become increasingly difficult over the course of the last year, and lenders, in general, are challenged to achieve appropriate risk-adjusted returns. Without question, there is a lot of money in the market for chasing stabilized opportunities. Some lenders have responded to the competition by taking on more and more risk, which is unwise at this stage of the cycle.
If there is a lot of money this time of year, then there will be even more once new allocations arrive in January. In the long run, lenient terms encourage borrowers to overextend and this has repercussions for the broader marketplace.
Q: Do you think there is a regionality to the state of the markets? Which markets are performing and which aren’t?
A: Commercial real estate fundamentally relies on very localized demand drivers, coupled with supply fundamentals. While there are certainly regional factors that influence rents and occupancies, performance frequently comes down to how well a property is positioned to capture tenants over time. Since “hot” markets come and go, lenders are well-served to avoid the associated over-exuberance. Markets can quickly get out of balance when the hype of a hot residential market spills over into the commercial realm. The first signs of this are stories in the trade press that speak of a “paradigm shift” as a means of justifying a run-up in pricing or super aggressive loan terms. The “new normal” seldom triumphs over market cyclicality.
Q: Which property types are seeing the most activity? What is Alliant interested in?
A: Industrial has become the new retail, and it is doing well at the expense of retail itself.
We’re seeing retail with exaggerated rollover risk, and we’re very sensitive to lending on retail properties that are impacted by e-commerce competition.
Office is selectively attractive. Hotels can be selectively attractive too, though lenders have pulled back considerably.
The most sought-after property types for Alliant are industrial, self-storage, and multifamily, along with parking facilities and manufactured housing. The trend of industrial is strong, as distribution facilities and warehouses replace retail and industrial takes on different shades, such as last-mile distribution.
We like self-storage because of sticky tenancy, and because put simply, people seem to be infatuated with owning stuff. Manufactured housing also has sticky tenancy. Once someone moves in, they have a vested interest in staying in a property. Those diversified income components and less exposure to a large tenant make them appealing opportunities for Alliant.
Q: How do you structure deals to compete in this market?
A: We are very good at responding to borrowers’ needs. That could mean longer interest-only periods, attractive pricing, or stepped down pre-payment penalties.
Credit unions are often not typically a “top of mind” lender for commercial real estate, but we are a viable adjunct to other capital providers. Credit unions are a good source of additional capital and can frequently complement a borrower’s traditional banking relationship, which may be at capacity or potentially unable to lend in a particular market.
Credit unions are structured to serve their members, and we evaluate commercial lending opportunities with the long-term welfare of our members in mind. Some credit unions are local, others regional, while some, like Alliant, are national in scope.
For comments, questions or concerns, please contact Dennis Kaiser