By: Kevin Zimmerman
Banks lending to developers in Fairfield and Westchester Counties report that business has been steady for the past 12 to 18 months, thanks to low interest and capitalization rates.
The future looks to promise more of the same – no wild swings up or down – though there is some debate on how General Electric’s exit from the city of Fairfield may impact that county at large.
“We’re on a slow, steady path of growth,” said Gary Magnuson, executive vice president and head of commercial real estate (CRE) finance at Citizens Bank. “Given the economy and the fundamentals, we’re looking pretty strong both nationally and locally within the greater New York area.”
Not surprisingly, the pace of CRE deals is particularly strong in the area’s major cities: Stamford, Norwalk, and White Plains. “Transit-oriented locations fare well in mid- and lower Westchester and in Fairfield County. That is where we see the greatest activity,” said Robin Gallagher, senior vice president CRE at Webster Bank.
“There’s certainly more development in lower Fairfield, as well as in Westchester up to Katonah,” said Steve Gagnon, assurance director for Reynolds & Rowella, a regional accounting firm based in New Canaan. “There’s a fair amount of liquidity throughout the area, and the banks are by and large more business-friendly than they have been” over the past few years.
And that outlook is not limited to the big banks. Historically, community banks have thrived in the commercial real estate market. “As a small commercial bank, we are able to deal with customers on an individual basis, taking into account any nuances in their credit that may exist,” said John Tolomer, president and CEO of The Westchester Bank and The Westchester Bank Holding Corp. “We’re built to be out talking with them, looking at their primary and secondary sources of payment.”
Finding tenants to reside in existing commercial properties looks to be somewhat challenging. In January, Norwalk-based commercial real estate brokerage and consulting firm Choyce Peterson produced its latest Silhouette Study, which graphically illustrates changes in office space vacancies from year-end 2014 to year-end 2015 in larger Class A office buildings in Stamford, Greenwich and Norwalk.
“Interestingly, for the first time since we began producing this poster in 2010 the overall vacancy rate has declined in all three markets for the buildings depicted on the poster,” said Choyce Peterson principal John Hannigan. The reduction, he added, was driven in part by two strong submarkets: the seven buildings located within ¼ mile of the Greenwich train station, where the vacancy rate decreased from 18.5 percent to 11 percent, and the 11 buildings located at and near the Merritt 7 Corporate Park, where the decrease was from 12.7 percent to 9 percent.
“In 2016 we expect strong leasing momentum in Greenwich, Stamford and Norwalk, with activity picking up in the higher vacancy submarkets of these municipalities,” Hannigan said. “However, we expect availabilities in larger buildings will continue to keep the overall Fairfield County vacancy rate high.”
The impending loss of General Electric remains the big question.
“GE is the great unknown,” agreed Gagnon, saying the corporation’s exit could have a negative knock-on effect not just in the town but throughout the county. “There’s nobody on the horizon who’s coming in to build and make a major change to the landscape.”
“The GE situation is interesting,” commented Magnuson at Citizens. “That could create a hole that will certainly be difficult to fill. But there are still a lot of corporate headquarters and employers in Fairfield, especially in Stamford and to a lesser degree Norwalk.”
It can hardly be said that all is lost, however. Sources at most of the banks lending in the two counties tended to agree with the findings of the first CRE lending survey conducted by the American Bankers Association (ABA). Released on April 19, the survey cited strategic planning and demand as the biggest driver in growth, with multifamily, office and retail representing the most active types of CRE lending.
“We have definitely seen a fair amount of developments in the market for multifamily space,” said Anthony Giobbi, chief lending officer at Newtown Savings Bank, which in addition to Fairfield issues CRE loans in Litchfield and New Haven counties.
First-time home buyers who had been waiting for the economy to improve, and empty nesters looking to downsize but not necessarily leave the area, are driving the momentum, he added. “In Stamford that trend has been in place for a while, and we’re seeing it particularly in Danbury at this point.” Other particularly active towns include Newtown and Oxford, he said.
Most banks in the survey identified regulatory burden as their primary concern for the CRE industry, with nearly 65 percent indicating that recent regulatory guidance on CRE risk management will cause a measureable reduction in credit availability.
This concern is driven by an interagency statement issued last December by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation. That statement served to remind financial institutions to reexamine existing regulations and guidance related to CRE lending and warned banks that regulators this year will renew their focus on the management of concentration risk in commercial real estate lending.
Of paramount importance is adherence to guidance issued at the end of 2006 focusing on the risks of high levels of concentration in CRE lending at banking institutions. The agencies set forth two supervisory criteria that they intended to focus on: total loans reported for construction, land development and other land representing 100 percent or more of the institution’s total capital, or total CRE loans representing 300 percent or more of the institution’s total capital, and whether the outstanding balance of the institution’s CRE loan portfolio has increased by 50 percent or more during the prior 36 months.
The ABA report found that 9 percent of the surveyed banks had 300 percent or more capital concentration in CRE lending, and 19 percent reported 100 percent or more capital concentration in construction lending.
The banks interviewed for this story all said they were well within the regulatory guidelines. “We monitor those limits on a monthly basis in accordance with FDIC guidelines,” said Giobbi at Newtown, “and we are well below those percentages.”
“We are well capitalized and have ample capacity,” Webster’s Gallagher said. “The bank has a very balanced portfolio of lending products in consumer loans, commercial loans and CRE and not a lot of concentration in any one product type. As a result we have greater opportunity to lend in CRE while holding on to our underwriting standards within our acceptable risk tolerance.”
Similarly, those interviewed said they tend to approach competing with each other by focusing on a given customer’s needs. “We target the best sponsors in the best markets with projects that really make sense,” said Magnuson at Citizens. “We are a larger bank, so we bring a level of expertise and experience to the table. We have a big balance sheet, so we’re able to handle bigger deals.”
“It’s important to stay competitive, but we tend to avoid transactions that are all about rates,” said Giobbi. “We focus principally on meeting our customers’ objectives by tailoring our offerings to their specific needs. We want to act as advisers to our borrowers, and help them make decisions that are right for them.”
“We look to build relationships,” agreed Tolomer at The Westchester Bank. “We tend not to simply do a loan and move on. We tend to work with clients who want a long-term relationship with a bank that’s interested in doing business. They find us very user-friendly.”