Strength in apartment demand sparks CRE lending by banks

Commercial real estate lending is expected to continue on a growth trend in 2013 with the help of a robust multi-family market.

The pipeline and loan closings continue to be strong, and the markets have returned to pre-financial crisis levels, indicating they have healed themselves, said Michael Finn, senior vice president of commercial real estate at Associated Bank in Milwaukee.

For that reason, Finn said 2013 will at least be on par with commercial real estate loan activity in 2012. He is expecting 10 to 15 percent growth, predominantly driven by multi-family apartment projects.

“That includes both acquisition of existing product, refinancing of existing product and new construction opportunities,” Finn said.

Pent-up demand from 2007 to 2012 and historically low interest rates have encouraged considerable loan demand this year, he said. And money is readily available.

“Most of the banks, over the last probably two to three years, have had an opportunity to shed themselves of troubled real estate loans. They’ve cleaned up their balance sheet (and) they have lots of capital to lend,” Finn said.

While he could not give the expected commercial real estate lending figures for 2013, Finn said Associated Bank plans to return to 2007 loan volumes this year.

Population demographics indicate the demand in the multi-family sector will continue on a solid growth trend for the next five to six years, he said.

There are some new office buildings and medical office buildings taking out loans, but Associated Bank is still requiring high levels of pre-leasing.

“I think there’s demand out there, and I think there’s enough new projects or refinance opportunities,” Finn said. “I think the reality is we have lots of banks, lots of capital chasing quality deals right now.”

Brown Deer-based Bank Mutual Corp. also expects steady or better commercial real estate lending this year than last year, said president Dave Baumgarten.

The bank loaned $175 million for investment real estate and another $50 million for owner occupied real estate in 2012, he said.

Bank Mutual is on track to exceed that by about 15 to 20 percent, Baumgarten said.

“The thing that was really hot in 2012 and that continues to be hot in 2013 is multi-family,” he said. “Real estate goes in cycles. You’ve got everybody kind of thinking of building multi-family now; you’ve got to guard against having too much multi-family three years from now.”

There are a few loans on the industrial and retail sides, but everything is being dominated by multi-family right now, Baumgarten said. About 75 percent of the bank’s commercial loans were multi-family projects last year, excluding owner occupied projects.

Depending on business sentiment regarding the economy, that trend could change in the remainder of the year, he said.

“If the economy starts to pick up a little bit as we go through the third and fourth quarters of the year, I would hope to see a little more activity on the industrial and retail side,” Baumgarten said.

At U.S. Bank, commercial real estate lending has started a little slowly in the first quarter, mostly because of a rush to complete deals at the end of 2012 ahead of tax changes, said Stephen McGuire, Wisconsin commercial real estate market manager for the bank.

Now, there’s a substantial pipeline of new deals, McGuire said. The bank expects a flat 2013.

“It looks to me like 2013 volume-wise will be similar to 2012 and 2011, which were very strong years for the bank,” he said.

U.S. Bank has seen both a good volume of large transaction and smaller loans this year, with a growing number of multi-bank syndicated loans.

“Apartment, office and medical office are the three most active niches that we’re involved with right now,” McGuire said.

The medical field has high loan demand since it’s a growing market. Office space absorption is pretty low, and there are a small number of speculative industrial buildings going up, he said.

The most active geographic areas are the Third Ward and Walker’s Point neighborhoods in Milwaukee and the industrial markets in Pleasant Prairie and Kenosha, McGuire said.

Demand for commercial real estate in southeastern Wisconsin and the state overall has been very strong this year, said Doug Brodzik, managing director and head of commercial real estate for Wisconsin at BMO Harris Bank.

“The market has seen an uptick in requests for loans and activity for our real estate group, Brodzik said.

That matches with the national trend BMO Harris has experienced, said Dan Hampton, managing director and head of commercial real estate nationwide.

There was some pent up demand, particularly in the multi-family sector, and occupancy rates remain strong throughout the country, Hampton said. Milwaukee’s apartment market is at 96 to 97 percent occupancy and Madison’s apartment market is at almost 100 percent, which are higher than the average market.

“We’re really seeing a lot of opportunity in construction lending in that sector,” Hampton said.

The most active sectors have been multi-family, industrial projects in the south suburbs and build to suit tenant medical, Brodzik said.

A lot of the current Milwaukee area demand is for urban infill sites, which are a little more difficult to construct than suburban projects, he said. He expects that while the apartment market is driving some additional supply, that supply will remain in balance with demand for some time.

BMO Harris is shying away from speculative building, except in the industrial sector, Hampton said. The bulk industrial sector is at 97 to 98 percent occupancy in Milwaukee, which is very high compared to the rest of the country.

“Our momentum is strong,” Brodzik said. “We expect it to continue for the rest of the year. In fact, it’s accelerating.”

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