Still boom times for LI borrowing

A healthy pace of activity has commercial lenders feeling optimistic about the year ahead, but the threat of interest rate hikes looms

Mar.March 05, 2018 01:00 PM

The commercial real estate lending market on Long Island has had a good run over the past two years, and industry insiders are expecting the streak to continue through 2018.

Much of the growth has been fueled by the robust economy and continuing low interest rates, both of which have made businesses more keen to borrow, experts said. This upward trajectory has been evident nationwide, as commercial loans from banks topped $2.13 trillion in January 2018, an increase of roughly $1 trillion since 2010, according to the Federal Reserve.

There have also been market-specific developments that have given Long Island lenders an added boost, including the continued strength of the industrial sector, which has benefited from low vacancy and rising rental rates; the explosion of residential housing in Brooklyn and Queens that has forced many businesses to migrate east; and the revitalization of various downtown areas on the island.

Lenders think the market will remain strong, and that seems likely, considering the promise of some large upcoming projects. For example, Gov. Andrew Cuomo announced last year that the state will invest $5.6 billion in more than 100 capital projects for the Long Island Railroad. The plans are projected to increase ridership capacity by over 80 percent. But not every market indicator is positive: The unemployment rate for Nassau and Suffolk counties, for example, rose to 4.2 percent in December 2017, from 3.9 percent the year before.

Looking ahead, many in the industry anticipate the commercial real estate market will benefit from recent tax reforms. It’s too early to gauge how meaningful the impact will be; however, the expectation is that the changes will give a boost to businesses, which could translate to increased borrowing.

On the flip side, lenders are keeping a close eye on some potentially negative developments, including further erosion of the retail sector, as well as increased interest rates, which — depending on how high they go — could end up being the big party pooper.

Keith Miller

Keith Miller
Chief lending officer
Suffolk Federal Credit Union

Aside from low rates, are there any other factors behind the growth in lending? I’ve noticed over the last few years that companies overall are doing better. Their finances look stronger, and a lot are doing better in terms of growth — income and revenue. That’s been good for us and makes it easier for us to lend. We are also seeing new applicants enter the space. That is largely due to interest rates and the cost of funds being so low.

How competitive is the market for lenders? Most of what we do is commercial, owner-occupied and investment property loans up to $5 million in lending needs. That’s our market niche and it’s very competitive. Most of our competition is with other community banks and large credit unions. For credit unions, one advantage we have is no prepayment penalty. So, when we go up against a bank, that’s a competitive advantage for us. There’s not a lot of competition for us with alternative lenders because with rates being so low, if a borrower can qualify for conventional financing, it’s usually less expensive for them.

What’s the hot topic at the lender conferences these days? Interest rates. That’s the big concern. We’ve been hearing for the last two years that rates are going to be higher, but it hasn’t happened, though we do think rates are going to be at least slightly higher by year’s end. If rates do continue to rise, refinances could definitely slow down, as could purchases because of the cost of funds.

Anthony Esernio

Anthony Esernio
Long Island market president
for suburban New York, TD Bank

Have there been meaningful changes in terms of the number of loans being issued and the size of the loans recently? It’s been very consistent. The Long Island market is extremely competitive. Demand for loans is good, but we are an island, so supply can
be limited.

How competitive are alternative lenders with traditional bank lenders? Alternative lenders have been a consistent player. In terms of larger deals, you have insurance companies that are doing deals. Those entities don’t face the same regulations that a bank would face, and they can set terms that are lengthier than what a bank’s appetite might be. So, they’re a formidable competitor. With smaller deals, you have the smaller banks that are solid competitors. They don’t have the same regulatory requirements and they can be more nimble.

Are there any types of loans that banks are more reluctant to issue? There is a hesitancy with banks to issue construction loans unless that’s their specific niche. A lot of banks look for stabilization and with construction loans, there’s more risk. You don’t know who is going to fill the space, which is a lot riskier than with a building that already has tenants and is producing income.

As you look ahead, what are your biggest worries for the industry? The main thing that would concern us is interest rates. They have gone up a lot…Early on, when the Fed was increasing short-term rates, it didn’t necessarily correlate to 10-year rates. But now, those rates are catching up. 

Toni Badolato

Toni Badolato
Senior vice president of commercial lending
People’s United Bank

Where are you seeing the greatest growth in lending on Long Island? I’ve been seeing a lot of growth with small business and companies with revenue under $10 million. In the mid-market — companies with $10 to $500 million in revenue — it’s been pretty consistent. In terms of the large companies, I don’t see a lot moving into this area, but I don’t see them moving away either.

With so many banks and alternative lenders out there, how do you stay competitive? There are alternative lenders on different levels. On the small business side, they are very competitive because they’re not regulated as [traditional banks are] and their turnaround is very quick. Someone can go online, complete a loan application and get notified within 24 hours. We are looking into similar types of products to help us stay competitive.

There hasn’t been much of a change in terms of larger lending with regard to alternative lenders. For bigger tickets, the competition is really between other banks. With these large companies, our goal is not to be transaction-oriented but [to add value by] serving as an adviser to the CEO and CFO and really trying to become part of their team.

How has demand for construction loans changed? Because of the increased demand for mixed-use buildings, we are seeing more construction loans [in that sector], and I expect to see a lot more demand. We are seeing more construction financing than we have seen historically. Between the last quarter of last year and going forward, there are a lot of construction loans in the pipeline.

How optimistic are you about recent changes in the tax laws? We are looking forward to the new tax law because most of our business will see an increase in their bottom line, which means that either they’re going to borrow more…or they’ll invest more in their business — and usually they have to borrow money to do that. 

Jason Lipiec

Jason Lipiec
President of Long Island Market
M&T Bank

Can you provide a rundown of how loan activity has fared across different sectors? Multifamily continues to be very active, and there is a fair amount of new construction requisitions, mostly in Suffolk but some in Nassau as well. There’s been an uptick in finance for some assisted living facilities. In the office space, there are pockets that are good, but office is kind of a quirky product here. Industrial is strong, specifically as businesses in Long Island City are being pushed out and displaced by new residential developments.

How worried are you about rising interest rates? I worry demand may go down a little. People considering a refinance may hold off. Sales may not occur as much or as soon as we thought.

How common are loan delinquencies? Thankfully, delinquencies have been negligible, if at all. We’re keeping our eye on retail given the weakness in some areas there. If there are any areas where we are seeing some stress, it would be with retail clients, but not in terms of delinquencies at this point.  Loan quality is pretty strong right now.


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