Many local credit unions and community banks are turning to commercial real estate lending as residential mortgage interest rates stay low but face limited profits thanks to stiff competition.

As economic conditions improve and interest rates remain low, commercial real estate has provided lenders with opportunities for growth and new relationships with developers. 

The first few months of 2021 have seen commercial real estate lending volumes more than double in several Massachusetts counties compared to the same period in 2019 according to data from The Warren Group, publisher of Banker & Tradesman. 

With the pandemic leaving uncertainties around some types of properties, including office buildings and hotels, lenders have faced competition for the opportunities that are available in the market. Amid the competition, commercial real estate provides one solution to the deposit surge affecting banks.  

“As banks we’re all flush with cash,” said Rich Spencer, president and CEO of North Easton Savings Bank. “We’re eager to deploy the cash in the marketplace.” 

Lenders Seek Liquidity Opportunities 

While the growth in commercial real estate has not touched all regions of Massachusetts, several counties saw increases in the number of commercial real estate purchase mortgages between January and May of this year, compared to the same period in 2019. Essex County had a 339 percent increase in volume and 6 percent increase in the number of loans. Bristol and Worcester counties each saw volumes grow by more than 200 percent, and the number of loans in the first five months of 2021 went up by 12 percent in Bristol County and 13 percent in Worcester County. 

Even during 2020, community banks had continued to lend in the commercial real estate space, said Michael Riccio, senior managing director and co-head of national production at CBRE. Other types of lenders had stopped providing liquidity, he said, but regional and community banks and credit unions remained active during the pandemic and used the opportunity to increase their market shares. 

While other types of lenders have resumed their activities, Riccio said CBRE’s business with bank lenders has remained strong in 2021. Among the deals whose financing it arranged, 20 percent of loan volumes and 23 percent of deals were financed via bank lenders. Before the pandemic, he said those figures were between 18 percent and 20 percent annually. 

The deposit surge that started early in the pandemic has continued through 2021, leaving banks with cash to use for lending. Commercial real estate mortgages offer community banks an attractive lending option relative to risk and reward, Riccio said, leading banks to seek these opportunities.  

Multifamily, Retail Financing Active 

The first quarter was particularly active for Newburyport Bank, said Jamie Thompson, the bank’s senior executive vice president and senior lending officer of commercial lending. While interest rates remain low, prices have started to accelerate, Thompson said, bringing commercial real estate lending back to more normal levels of activity in the second quarter. He expects activity to remain strong throughout 2021 into 2022. 

Newburyport Bank continued to lend throughout the pandemic, Thompson said, helping to create a pipeline of opportunities. 

“Our bank is continuing to feel good about the current economic climate to lend into,” Thompson said. “We still think the market is fairly strong because we can meet our growth expectations without loosening our credit standards.” 

With prices high, most of Newburyport Bank’s lending has involved new construction of some kind, Thompson said, with buyers looking to increase the value of a property even more. 

Multifamily buildings, industrial properties and retail locations with multiple tenants, especially those anchored by a grocery store, have attracted attention from investors generally, CBRE’s Riccio said. Within the last three to four months, CBRE has even started to see more purchase activity among office buildings and hotels.  

North Easton Savings Bank’s Spencer has been seeing buyers in Bristol County looking for ways to transform buildings, including self-storage spaces, retail locations, doctors’ offices and mixed-use apartment buildings with retail on the first floor. Businesses that thrived during the pandemic have also been looking for more real estate to expand their operations, Spencer said. 

With workers still not fully returning to the office, Newburyport has done little office-related lending. Where the bank has seen activity in Essex County is in financing deals for self-storage facilities, retail locations, and condominium and residential buildings. Rents have not softened in the area in either residential or commercial buildings, Thompson said, keeping existing properties in high demand. 

“The market is very competitive right now,” Thompson said. “Both on the investor and the finance side, with a lot of money out there but not enough opportunities.” 

Race to Lower Rates 

Though investors are also facing competition for the limited properties out there, the competition among lenders looking to deploy cash has put buyers in the driver’s seat, Spencer said. 

“As investors, they’re getting good deals,” Spencer said. “They’re working out great relationships with their bank.” 

With limited office and hotel lending, banks have faced the challenge of trying to remain competitive for the financing opportunities out there without having to offer interest rates so low that they have little effect on profit margins, said Christopher Watson, senior vice president and senior lending officer at Webster Five.  

Underwriting standards have been slightly tighter during the pandemic, Watson said, adding that project sponsors have accepted that. A project that before the pandemic might have 75 percent to 80 percent loan-to-value ratio, today might be at 60 percent to 65 percent, with anything above that range requiring guarantees.  

Diane McLaughlin

The insurance companies and other capital sources that were not active in commercial real estate during the COVID pandemic have returned for some of the stronger deals, Watson said, leaving community banks having to decide whether they want to offer rates below 3 percent, which could hurt them in the longer term. 

“There’s a finite pool of deals, and every bank is going after them, so we’re just seeing really aggressive, aggressive pricing, which obviously benefits the borrower but it’s not benefitting the banks with their margins,” Watson said. “As we’re looking out, we’re saying: How do we hold this margin?”  

While Thompson with Newburyport Bank is optimistic about lending opportunities going into next year, he does see a limit to the current market. 

“There’s both investor and bank money chasing these deals, which is good for developers, but at some point, it will choke itself off,” Thompson said.