The numbers might not show a lot of commercial real estate loans on the books of banks statewide or even regionally, but borrowers and bankers said there is lots of activity in that sector.
It’s just that the activity has not led to a lot of new loans – at least not yet.
Where the activity has been coming from, they said, is in vying to be the lender of choice when a commercial real estate project comes up. Bankers said the competition has intensified in the past year. A lot of that has to do with area banks being rich in deposits, and a relative lack of other attractive options for their money.
Borrowers said it’s a far different situation now than it was two or three years ago. When Chad Stafford, president of commercial real estate development and management firm Occidental Management, went looking for financing for the company’s new Class A office park in northeast Wichita, the Offices at Cranbrook, there was no shortage of interest.
“We talked to, I know it was eight, it may have been nine, lenders who wanted to get in on that,” Stafford said. “In 2009, 2010 it would have been a smaller pool (of lenders).”
As one banker said: It’s a borrower’s market.
According to data compiled for The Eagle by the Federal Reserve Bank of Kansas City, the total amount of commercial real estate loans on the books of Kansas banks is at its lowest level in five years, $9.1 billion in the first half of 2012 compared with $13.5 billion in the first half of 2008. Commercial real estate loans in Kansas were also down from the same period a year ago, when they totaled $9.5 billion, according to the data.
In the Fed’s 10th District, total loans were $63.4 billion in the first half of 2012. That was down compared with $72 billion in 2008, but up from $59.6 billion last year.
Area bankers said the loans on books may be down but deal activity is up, if only slightly.
“I’d say we’ve had modest growth in our portfolio,” said Tim Nelson, executive vice president and chief lending officer at Fidelity Bank. Nelson said the growth has largely occurred from business outside Wichita, such as Oklahoma City, where Fidelity also operates.
Roger Kepley, president of Rose Hill Bank, said “certainly in the last year or two there has been more activity, more interest.” Kepley said he thinks that’s a function of a slowly improving economy and bankers being more comfortable with new regulations that have been implemented in the past few years. “It’s not wild and crazy out there, but there are some projects being done,” said Kepley, whose bank is the primary lender on Occidental’s Cranbrook offices.
Brent Beckman, Wichita market president of Arkansas City-based Union State Bank, agreed that demand has improved, if only a little. “We’re seeing a bit of an uptick maybe in activity, but a lot of the activity revolves around the smart borrower looking to benefit from the low interest rate environment,” he said. Low interest rates, Beckman said, have spurred some of his bank’s commercial clients to refinance at lower rates.
The increased competition among banks for the few commercial real estate projects and refinancings out there has benefited borrowers such as Occidental. The competition in some cases means interest rates of about 4 percent and more favorable terms, such as increased duration of loans.
“It has provided some really good debt financing in the market,” said Occidental’s Stafford, noting benefits such as terms extended to five years and longer. “There’s a lot more options in the market today,” Stafford said.
To win a commercial real estate loan or refinancing, some banks are getting more aggressive on rates, said Mike Smith, commercial real estate lending manager at Fidelity. He said he knows of some instances in which borrowers were offered interest rates below 4 percent. Those are rates “we never thought we’d see,” Smith said.
While the incentives may be attractive, bankers said the requirements to get a loan haven’t budged.
The borrower has to be a credit-worthy risk and has to have some money in the project to get a loan, bankers said. “I think the underwriting is still fundamental and conservative,” Beckman said.
And on projects such as retail and office buildings, borrowers have to have lease commitments in place before the money is loaned, bankers said. Unlike the years preceding the financial crisis of 2008 – when some borrowers could get 100 percent of the cost of commercial real estate loans financed – the tightened lending standards have not loosened.
Repeating what a lot of other business leaders have said, some bankers think Tuesday’s election and uncertainty about what Congress will do about the “fiscal cliff” are holding some projects back. Lenders think that once those two issues are resolved, there could be more activity in commercial real estate lending. But that doesn’t mean there will be a swell of new projects emerging next year.
“I don’t see it decreasing,” Beckman said. “There’s got to be additional, pent-up deals increasing, even if it’s slight.”
Kepley said his bank has a number of deals in the pipeline and is optimistic about Rose Hill’s prospects in commercial real estate loans going forward.
“We have a number of proposals … we’re working on right now,” he said, “a nice variety of things.”