- change ups
Signs of recovery for the real estate market
“There are banks back in business, as far as the real estate side” of commercial lending goes, according to Bob Grooters of Robert Grooters Development Co., one of the largest privately held development firms in West Michigan.
Contrast that to the comment Grooters made to the Business Journal near the end of November last year: “Banks aren’t banks anymore,” he said then, because loans were so hard to get.
Both Grooters and the senior commercial lending officer at Independent Bank say there have been several months of positive signs that we are leaving behind the “horrible, horrible” impact of the Great Recession, in the words of Jose Infante, a senior vice president at the bank.
“We had the same issues as everybody else,” said Infante, comparing Independent Bank to the general banking industry over the last three years. Property values plummeted, rental rates dropped, vacancies increased dramatically, banks took back large amounts of defaulted properties and then had to eat the losses because those properties were worth less than the money owed on them.
But things are changing, according to Infante.
“We’re seeing rental and price stabilization in some products in commercial real estate,” he said.
“As a result, you’re seeing the beginning of additional investor dollars coming back into the area. The overall trend is positive, especially in West Michigan, especially Grand Rapids. We’re selectively entertaining new loans in that area, especially multi-family, student housing stuff.”
“We’re actually doing some good deals lately,” he added, “which we were not even seeing six, eight months ago.”
One example of a strong sector, according to Infante, is student housing, which is being built at many of the major universities in Michigan, including GVSU.
“We’re still seeing people willing to invest dollars to support that sector, and it’s a good, strong sector. Those schools are all doing fine,” he said.
It’s a strong business, he said, because there are often pre-payments of rent upfront for students signing a one-year lease — plus, “usually mom and dad guarantee those” rental contracts.
Infante said there is also an increase in apartment property values, because people who can no longer afford to own a home are moving into apartments. Apartment vacancy rates are dropping, as a result, giving that sector a boost.
“Instead of having a 10 percent vacancy rate, now you’re seeing 2 or 3 (percent),” said Infante, especially for large projects with a dozen or more units.
“You’re finally seeing those prices stabilizing to some extent, so now there’s a comfort level, both for the investors and the banks,” he said, which is attracting lenders back to multi-unit residential projects.
Manufacturing also is coming back, said Infante. The manufacturers that survived the recession “have bigger market shares. They’re doing better now. Sadly, sometimes they’re just not hiring as many people back” because the process of survival during the worst of the recession resulted in more robotics, along with other improvements in efficiency. But still, he said, it is an improvement.
“Even some automotive is coming back,” he said.
“(Banks) all need to lend. We all need to increase our bottom line, too. And you don’t do that by just cutting. You do that by growing,” said Infante.
Grooters said, “Every bank has loosened up, that I know of.” Of course, there are different types of loan deals. Some he calls service deals, in which a bank concentrates on loans to its original clients, as opposed to seeking new customers.
“We build buildings and lease them out,” said Grooters, although some banks will only do loan deals involving owner-occupied properties.
Nonetheless, he said, there is movement in the financial industry. He said that one year ago, all the banks were very concerned about making loans, but that situation has changed — although the fear surrounding the government debt ceiling deadline had the bond market “jumping around” in late July.
“There are definitely banks getting back into the (commercial lending) area,” said Grooters, but he added that there is now “a different set of rules” and banks are being “a lot tougher” than pre-Recession.
“I guess I can’t blame them,” he said, because banks are reacting to stricter government regulation now.
“It’s not very easy to work with some of the new deals” banks are offering commercial developers, said Grooters. Those terms include shorter amortization periods and higher cash reserve requirements. In the past, at some banks, a 20-year amortization term was pretty common, he said, but today that is often tightened down to “15 or 16 years on a good transaction.”
Loan deals for building owners typically require them to maintain minimum cash reserves to be able to cover repairs and maintenance, or other unanticipated costs. Now banks have increased reserves requirements “drastically, because if the building comes into default, they have a nice pot of money to work with,” said Grooters.
“That all kind of takes away from the bottom line” for developers, he said.
Grooters said his company is working to put together several new construction projects, noting that development of commercial properties is “an amazing market right now.” He said the vacancy rate in commercial/industrial properties has dropped from 17 percent to around 8 percent — “and it happened quite rapidly.”
He said that about a year ago, there might have been as many as 20 real estate signs on Roger B. Chaffee Boulevard. “You drive down there today, there’s none. The buildings are being picked up.”
“The automobile guys who survived are doing exceptionally well,” he said, and the growth in the food industry is “outstanding.”
Grooters said he has no involvement in new home construction so he isn’t sure how that industry is doing, but his 34-story River House condominium tower downtown is now about 85 percent occupied. “We usually sell three or four units a month — at great discounts, of course.”
Grooters likes to make the point that “there’s always a way to figure things out” when it comes to arranging financing of commercial/industrial development. During the last major financial trouble in the U.S. — the S&L crisis of the late 1980s and early 1990s — domestic lending for development dried up and he was forced to borrow money from foreign banks.
For his Bridgewater Place project, Grooters said he went to New York several times, eventually contacting more than 100 international lenders with offices there, “and ended up with three Japanese banks and an Australian bank.”
He said he again has been dealing with some foreign banks for financing, although he would prefer not to. “Because our rules (bank regulations) are so tough, they end up making a profit — and not our guys,” said Grooters.
“We are actually doing a transaction with the Singapore government itself,” he added.
Credit unions are also active in some commercial real estate development, said Grooters, although many are too small to be able to finance the size of projects launched by his company. “But I think it’s a great option,” said Grooters. He said his company has spent a considerable amount of time talking to credit unions about loans over the last six to eight months, and got “good response.”
“The good thing in all of this is the markets have really picked up nicely. Our town is getting back to the shining side again,” including “the industrial side. And that’s what we need. It’s what generates the jobs.”