Healthy economy creates banking competition
While commercial real estate lending is robust in downtown now, one exec predicts a slowdown in the near future.
A healthy economy has spun a competition among commercial real estate lenders in West Michigan.
According to Mark Augustyn, Mercantile Bank of Michigan’s west region president, more banks and credit unions have “aggressively” moved into the West Michigan area to conduct business with commercial real estate developers.
That “fervor in the market” prompted the rise in purchases of property spaces to build businesses following the 2009 recession and the steep climb in the economic recovery process.
Augustyn said that during the recession, many larger financial institutions either left the real estate industry or moved out of the area.
As a result, he said a lot of new smaller banks and large banks with satellite branches have moved into the area post-recession, and they are creating intriguing incentives to developers so they can join their institutions and begin financing their projects through loans.
Some of the incentives include lower interest rates and lenient terms in their contracts.
In the real estate industry, Augustyn said it is easier if the banks are closer — hence, more satellite branches — so they can build a relationship with their borrowers, including learning about their financial history, their prospective tenants and the type of projects they plan on building. The institutions can then weigh the potential risk and benefits of the transactions.
“They are pushing the boundaries on financial offers, causing existing institutions to compete,” he said of the newer financial institutions in the market. “Competition isn’t a bad thing, but it may hurt them in the long run because times can change.”
Times already are changing, according to David Quade, regional president for Horizon Bank. He said over the last two to three years, there has been a greater growth in the lending market, but in the last 15 months, interest rates have been rising.
The Federal Reserve raised interest rates from 1.75 percent to 2.0 percent in June. Prior to that increase, the Fed increased the interest rate in March from 1.50 percent to 1.75 percent.
“The federal government is worried about inflation,” Augustyn said. “So, now they are raising rates because the (commercial real estate) market is growing so fast.”
Although the Fed rate is rising, Augustyn said it is at a historical low compared to the 1980s, 1990s and 2000s before the financial crisis started in 2008.
While commercial real estate lending is robust now, Quade said he predicted the lending climate will hit a plateau within the near future, especially in downtown Grand Rapids.
“There will be a slowdown in downtown Grand Rapids projects,” he said. “It will be driven by the projects, as we see higher construction costs and higher interest rates that will affect the number of new projects coming on the (market). So, if you look in the pipeline of projects, I think that there will be fewer projects slated for the future than what there is going on right now.”