Bankers have fewer opportunities to chose from when making commercial real estate loans right now, as a difficult economy makes for more challenging deal-making. iStock photo illustration

Amid the rapid rise in interest rates and economic uncertainties, community banks continue to close new commercial real estate loans, including for multifamily projects looking to address the region’s housing needs. But the money isn’t flowing as freely as it might once have. 

“There’s a good strong demand in the marketplace for a good lender that can execute on their commitments,” said Joe Campanelli, president and CEO of Needham Bank. “But I do think that a project has to stand on its own. It’s not a case where ‘you build it, and they will come’ – it’s got to be well-conceived; it’s got to be the right product in the right place at the right time.” 

While Massachusetts saw the number of commercial real estate deals decline slightly year-over-year by 2 percent during the first three quarters of 2022, more than 7,400 commercial real estate mortgages were issued statewide, according to The Warren Group, publisher of Banker & Tradesman. 

Megabanks Had Pulled Back 

Community and regional banks have had an active role this year as economic conditions led large national to mostly stay away from commercial real estate opportunities, said Rob Borden, a senior vice president with commercial brokerage CBRE. 

“We’re well positioned in Boston specifically because we have such a strong local and regional bank market,” Borden said. “What we saw starting in the spring is as lenders pulled back – the national banks pulled back – the local regional banks continued to be very active, and we continued to see that through the summer.” 

With local banks active in the market, much of the commercial real estate lending this year focused on smaller amounts, either individual loans less than $50 million or larger transactions that saw multiple banks participating together, Borden said. 

The Federal Reserve’s rapid-fire interest rate hikes have led to less activity this year, Borden said, and refinances have declined as well as borrowers hold on to lower rates.  

‘Difficult’ Market 

Banks have found opportunities to support multifamily developments as the rising-rate environment has made homebuying less affordable or even unaffordable for prospective homebuyers, locking these families in the rental market.  

Joe Wadlinger, executive vice president and chief lending officer at Peabody-based North Shore Bank, said the bank saw more proposed projects that were being built with the intention of selling the units during the summer. Now, the demand for rental housing has spurred multifamily rental projects.  

“Buyers have less purchasing power,” Wadlinger said. “Since supply-side is still very much an issue in our region, serving that supply-side gap, it makes sense that rental units would be a better option for some sponsors than building units to sell.” 

Wadlinger said sponsors recently have been rethinking the economics of projects, but the bank continues to see opportunities with sensible, profitable projects. 

“When the market gets difficult, bankers need to focus on good client selection and hold onto thoughtful and prudent underwriting,” Wadlinger said. “We have a number of really good clients that have performed well through different market cycles, and we’ll continue to talk with them about what they’re seeing and feeling and what they’re presenting in terms of opportunities for us.” 

While Institution for Savings in Newburyport has seen a lower level of activity within its base of commercial real estate developer clients, the bank sees opportunities in continuing to lend in the current environment, even as the Fed’s interest-rate increases mean some projects don’t pencil given the region’s high cost of construction and other factors. 

“We see this as a potential opportunity to remain with our core underwriting guidelines and possibly attract other good-quality, high-quality customers to the bank,” said David Boudreau, senior vice president of lending at IFS. 

Mark Zink, also a senior vice president of lending at IFS, said while the Federal Reserve’s monetary policies have slowed down activity, lending can still work in the current environment. 

“We would be doing a disservice to the economy if we turned [financing] off for good borrowers, for good solid credit deals,” Zink said. 

Could Activity Pick Up? 

While the timing remains uncertain, CBRE’s Borden expects commercial real estate activity to pick up in 2023.  

“There’s a significant amount of pent-up transactions,” Borden said. “I think there are going to be opportunities.”  

Diane McLaughlin

Borden does expect national banks to return to commercial real estate lending in the first half of 2023. He added that more clarity around the Fed’s intentions toward future interest rate increases will help bring clarity to the market.  

Campanelli said Needham Bank has a strong commercial real estate pipeline heading into 2023. He added that the region from Southern New Hampshire through the South Shore remains an attractive market, particularly for multifamily projects. 

“I’m still a big supporter of the region, just given the infrastructure, the colleges and universities in generating such a strong labor force,” Campenelli said. “We’re not without our challenges … so you want to be sensitive that we’re attracting and retaining good businesses, which in turn keep good employees which then can provide consumption that supports multifamily and hospitality and those types of developments.”