Recovery of select residential real estate markets presented a growth opportunity in commercial lending at some Connecticut banks in 2015, as homebuilders tested the market for new construction after years of inactivity.
And while vacancy rates put a damper on office construction, demand for multifamily properties, medical offices and hotels characterized commercial development hotspots, according to lenders and real estate executives.
Loans to residential builders are one of the fastest-rising categories in Simsbury Bank’s commercial loan business, CEO Martin Geitz said, comprising about 12 percent of the bank’s commercial portfolio.
“Over the last 18 to 24 months in central Connecticut, we’ve really seen consumer demand for new homes come back,” he said.
At $102.6 million at the end of the third quarter, commercial and municipal loans have increased 4 percent in 2015 and now comprise 34 percent of Simsbury Bank’s lending portfolio. The bank has set a goal of increasing their share to 50 percent, Geitz said.
After raising $16 million in capital in November, it will use the additional capacity to support commercial loan growth and open a new retail branch in West Hartford.
Growth of home building loans supplements Simsbury Bank’s traditional bread-and-butter of loans for owner-occupied commercial real estate. Such borrowers are typically manufacturers or industrial service companies, and occupy at least 50 percent of the properties.
The residential development rebound has been spotty, given the Connecticut housing market’s struggles to regain pre-recession levels. Median single-family prices are still 17 percent below those from October 2006, according to transaction data from The Warren Group, publisher of The Commercial Record.
Builders are back in the game for custom-built homes and small subdivisions, typically ranging from five to 30 lots, Geitz said. Simsbury Bank typically finances the subdivision infrastructure and a maximum of one or two spec homes, he added.
The cautious approach reflects the slow recovery of the housing market, where the strongest demand is in the inner-ring Hartford suburbs.
“We’re seeing good demand close in to where the major employers are,” Geitz said.
Chelsea Groton Bank also has seen lending for home construction stage a comeback over the last 12 months. Most of the demand is for contract homes built along the shoreline from Old Lyme to Stonington, CEO Michael Rauh said.
The construction market had dried up since the recession but has reemerged gradually as the market continues to absorb existing inventory.
The bank is expected to end the year by topping 2014’s $198.6 million commercial loan portfolio, which is driven by mortgages of owner-occupied commercial properties, Rauh said. To take advantage of loan opportunities outside of its longtime southeastern Connecticut base, Chelsea Groton opened a new Hartford County lending center on Oct. 1 in Glastonbury.
The Federal Reserve Board’s early December decision to raise interest rates by a quarter of a percentage point is unlikely to have a substantial effect on lending in 2016, he said.
“There has to be a fundamental business reason to want to borrow money on the commercial side, and a quarter of a point isn’t going to change that dynamic very much,” he said. “Psychologically, if you’ve been on the fence, people might say now’s the time to do something before (rates) go up again.”
Meds And Beds Drive Development Loans
Demand for medical offices, assisted-living complexes and new apartments have driven demand for commercial development financing while double-digit vacancies keep office construction on hold.
In West Hartford, developer Charles Mallory of Greenwich Hospitality Group broke ground last summer on the 119,000-square-foot boutique Delamar Hotel, built in Blue Back Square on land leased from the town for an initial annual rent of $150,000. Financing for the $19 million project was expected to close in late December, including a $3 million loan from Simsbury Bank.
In Fairfield County, investors’ favorite asset category of the moment is leased multifamily properties with amenities, said Sean Cahill, a principal in Avison Young’s Norwalk office.
Major banks, insurance companies and Wall Street conduit lenders all have shown interest in providing acquisition financing for newer apartment complexes that are 125,000 square feet or larger, he said.
“There’s a belief there’s room for rent increases in the future, and they’re buying at very low cap rates,” Cahill said. “That seems to be a trend that’s continuing.”
