Banking & Finance and Real Estate

Commercial lenders stress caution, cash flow

Banks issuing loans to assisted living, hotel, retail, office, light industrial developers say market likely is nearing peak.

August 4, 2017
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Everybody wants a piece of the real estate pie in West Michigan: homebuyers, investors and commercial developers. Local bankers say the competition means borrowers had better show up with cash in hand.

Mike Manica, president and CEO of Grand Rapids-based United Bank, said before the recession, there was a perception that you could get a loan without cash or good credit — and that idea was insidious for developers, too.

“The days you read about that you could get high-leverage, low-cost deals, I don’t know they were ever there. It’s basic meat-and-potatoes banking,” he said.

“If you have a commercial real estate property that is a strip mall or an office type, it comes down to cash flow and down payment. It’s not any different, in my mind, than it’s ever been.”

Manica oversees a commercial loan portfolio of $435,361,980, up from $356,770,000 in 2015. He said United Bank issues loans for commercial, industrial, retail, office, hotel, residential rental, small business, medical, equipment and current asset financing.

“There’s very little we won’t take a look at,” he said. “But we do a lot of assisted-living types of properties. We also offer credit to hotels and a mix of retail (and) office borrowers, and I think the landscape is pretty well open. We do a little, not a lot, of agricultural land financing. We have a number of customers in rural areas we try to service as best we can.”

He said the bank offers interest rates for five-, seven- and 10-year periods, depending on the customer. As with any financing, favorable interest rates require good standing on the part of the borrower and a 20 to 30 percent down payment.

“It would depend on the leverage ratio, how much they’re putting down, how much experience they have, what the cash flow of the business is. The higher quality or strength of the business determines a better interest rate,” Manica said.

The same goes for securing a fixed rate for anywhere from one to 10 years.

“They would have to have a lower than average leverage ratio, and the borrower would have to show, independent of the property, the ability to support the project if it ran into some vacancies,” he said.

The Business Journal reported on July 31 that downtown Grand Rapids office vacancies are currently at 18 percent, as companies consolidate space or move to the suburbs.

In Manica’s experience at United, industrial real estate currently is a tough market, too, as the cost of new construction can exceed the property’s final appraised value, making a risky loan.

Brad Henion, senior vice president and chief lending officer at Sparta-based ChoiceOne Bank, said his bank, on the other hand, is experiencing success lending for industrial developers.

“We’re seeing light industrial building be in demand right now,” he said. “I would say if you have a light manufacturing facility near the airport … those are going very well right now, especially new construction.”

ChoiceOne, with a current commercial loan portfolio of $120 million, does financing for office and retail, farmland and multifamily residential. He said multifamily has seen the “most aggressive growth” in the past year, and retail has seen the biggest slowdown.

The stagnation in large-scale retail, “like the malls and that type of space,” follows the “Amazon effect” the Business Journal reported on last month. “We’re just starting to get into that (slowdown), but I can see that still contracting,” Henion said.

He said part of what continues to drive real estate demand in the region is the rise of interest from outside developers.

“We’re seeing a lot of out-of-town money coming into real estate; we see that trend increasing,” Henion said. “We’re seeing money come from California and the East Coast.”

This out-of-market attention recently was illustrated by responses to Grand Rapids’ request for qualifications for its 16-acre 201 Market Ave. SW property, as the Business Journal reported in April.

Developers from Detroit, Indianapolis and North Carolina threw their hats in the ring, along with West Michigan’s Rockford Construction.

Even with the local economy growing, Henion and Manica urge borrowers to take a cautious approach.

“I’d be cautious on your purchasing right now. It seems like we’re at a peak,” Henion said.

Manica indicated a possible pendulum swing in capitalization rates, which measure the return on investment of commercial properties.

“The higher the capital rate, the lower the value of the property and vice versa,” he said. “Capital rates have been going down, so people are buying at the top end of the market. So, I would say be wary of what you’re buying.”

Henion said while he doesn’t foresee a crash, it’s always smart to plan ahead.

“I still think Grand Rapids can sustain moderate growth in the next couple of years,” Henion said. “Between unemployment, people coming into town and job creation, we’re still a good play on commercial real estate. I tell you to be cautious but be looking. Make sure you’re buying right.”

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