David K. Drumm of the Anglo Irish Bank Corp. is pursuing new construction lending opportunities in the Boston market despite the retreat of major funding players.
It had been operating at breakneck speed, but suddenly, the caution flag has been thrown out for the state’s commercial real estate industry, and that could very well mean an extended pit stop for the development end of the business.
“It’s a lot quieter out there today than it has been in awhile,” acknowledged Bob Crowley, an executive vice president in Citizens Bank’s commercial real estate division. “A lot of key people are sitting on the sidelines right now.”
While Crowley and other lenders stressed that construction lending for new development or renovations will still be available, particularly given the strong performance of the local real estate sector, it is likely that any project will be subject to additional scrutiny given the recent slowdown in the economy and a rash of sublease space which has hit the market in the past few months.
“There will be less speculative building going on,” Anglo Irish Bank Executive Vice President David K. Drumm predicted last week. “It does look like that will tighten up this year.”
In some respects, it would seem that Greater Boston could support added supply. Thanks largely to the memories of the real estate crash encountered in the late 1980s and early 1990s, new commercial development has come on at a decidedly measured pace during the past five years. With bank regulators keeping a close eye on the situation, lenders now require strict pre-leasing levels, meaningful equity commitments and a measure of recourse that forces developers to ensure their project is financially viable before getting underway. When demand for office space surged last year, the lack of supply fueled a record run-up in rents that sent tenants scurrying to find lower-cost alternatives, often with little luck in that regard.
That situation may have been the impetus for Boston Properties to acquire development rights for 77 Fourth Ave. in Waltham last month, for example. Given the likelihood that competitors will have more difficulty financing their projects, cash-flush Boston Properties should be more confident that the 200,000-square-foot office building will have reduced competition once it comes on line. The firm paid the Nelson Cos. $13 million for the development rights.
Good Appetite
From Drumm’s standpoint, the relative health of the region will probably prevent a complete halt of construction, especially in core urban areas where new supply is harder to deliver. For that reason, he said Anglo-Irish Bank continues to seek out new opportunities, especially those involving established clients.
“We feel the fundamentals are still very good,” Drumm said. “We have a good appetite for deals right now, as long as they make sense.”
Anglo Irish Bank has a history of bucking the trend when necessary, something Drumm attributes to a relationship-based approach that garners a greater understanding of the customer’s needs, and confidence that established players will be able to see a project through to completion. The bank, for example, helped BV Development finance construction of its Brighton Landing office complex, one being built in a section of Boston not known for office functions. While Drumm would not discuss specifics due to client confidentiality issues, he did opine that Brighton Landing required a lender who could see beyond the risks of the deal to assess its long-range potential.
“There’s no question it was pioneering, but clearly the demand was there and tenants needed an economic alternative to Cambridge,” Drumm said. “It was the right project at the right time.”
Anglo Irish Bank is active in the middle market, providing loans from $1 million to $50 million, although Drumm said the Ireland-based institution focuses on the $10 million to $25 million range. Although it does encounter competition from such entities as Key Bank, Wells Fargo and Citizens, Drumm noted that small commercial banks typically cannot reach that market, while the Fleet Banks of the world usually find such deals too small to finance. About 20 percent of Anglo Irish’s commercial real estate activity is new construction, he said, with the remainder focusing on acquisitions and value-added opportunities.
Citizens, whose parent company also is based in Ireland, has about $250 million worth of construction loans out at present in the United States, said Crowley, 90 percent of which is concentrated in Massachusetts. The bank delves into projects ranging from retail and multifamily to office and industrial, he said, with deal sizes running from $5 million to $40 million. Like Anglo Irish, Citizens prefers a deal in the $20 million range, allowing the firm to do multiple deals with one client. Indeed, Crowley said the bank does not chase one-off deals, instead looking to create a long-term relationship with its borrowers.
The ability to offer various lending programs, as well as flexibility when needed, are top reasons why banks have continued to thwart conduit lenders from grabbing large pieces of market share, according to both Drumm and Crowley. While conduit lenders are able to offer non-recourse financing and some other benefits, the inability to renegotiate loan terms should conditions change is difficult for some borrowers to accept.
“From our customers’ standpoint, the ability to pick up the phone and call their relationship manager is very important,” said Crowley. “That’s a big selling point for us.”
