BANKS RETURN TO HOME CONSTRUCTION LENDING
A growing number of banks are making construction loans to developers as lenders become comfortable again with a sector that largely was to blame for the demise of more than 40 Chicago-area community banks following the housing bust.
From Chicago-based PrivateBank & Trust, one of the city’s top business banks, to small, low-profile lenders like LincolnWay Community Bank in south suburban New Lenox, banks see green in the real estate recovery. Competition is increasing and lending standards are easing from the onerous requirements banks were demanding of developers just a few years ago.
“What’s changed in the marketplace is there are some strong borrowers who made it through the crash,” says William Sperling, CEO of Oak Brook-based Republic Bank of Chicago, whose construction loan balances rose 41 percent in 2013 to $90 million. “There are no amateurs out there.”
Still, bankers’ eagerness to lend to commercial and residential developers will give some pause. In the lead-up to the financial crash of 2008, smaller banks found themselves elbowed out of virtually every other loan category, making them especially vulnerable to the vicious cyclical bust that hit the real estate industry.REAL ESTATE ‘THE DRIVER’
Many CEOs of surviving community banks vowed never again, turning instead to commercial and industrial lending. But they’ve found it difficult to make much headway in that loan category, dominated by larger banks with more expertise. That makes a return to residential real estate lending more tempting.
“We can get some of the local (business loans),” says Mark Stevens, CEO of LincolnWay, an eight-year-old bank with just $137 million in assets. “But the real estate stuff is still the driver.” LincolnWay’s construction loans more than doubled in 2013, to $14 million from $6 million. They account for 14 percent of the bank’s total loans, up from 7 percent at the end of 2012.
Mr. Stevens says much of his bank’s lending is taking place, somewhat surprisingly, more than 40 miles away in Chicago’s Lincoln Park neighborhood, where builders are tearing down older buildings and building multimillion-dollar homes. But he says tract building in the suburbs is showing very early signs of revival as well after coming to a crashing halt in the recession. The bank plans this year to finance a new 36-lot subdivision in nearby Mokena.
Experts say the risk in real estate lending is far lower today than it was at the height of the housing bubble. And they don’t see signs that will change in the near future. “I don’t see the potential for a bubble in the real estate market,” says Jim Adkins, a former community bank CEO and now principal at Barrington-based bank consultancy Artisan Advisors LLC. “A good real estate market generally makes for a good real estate loan.”
With $14.1 billion in assets, PrivateBank is one of the larger local banks whose construction loans have grown substantially, rising 54 percent in 2013 to $293 million. Karen Case, president of commercial real estate, says PrivateBank is finding opportunities in senior housing, student housing, office buildings and even small-scale condominiums. “There are good projects in slow markets and not-so-good projects in great markets,” she says. “We stick to our knitting and deal with the developers and projects we believe in.”
A few things are helping the Chicago market from becoming overheated. One is that many banks are still working out the bad loans on their books and are unable to lend actively. The other is that borrower demand remains modest.
Construction and development loans held by Chicago-area banks were $3.9 billion as of Sept. 30, flat with June 30. That was the first time in five years such loans hadn’t declined from the previous quarter, according to data from Oakland, Calif.-based Trepp LLC. But the level of lending is a fraction of the $27.5 billion in construction and land loans that was held by local banks on Sept. 30, 2008.MORE TO COME
As more banks emerge from their recessionary bunkers, competition undoubtedly will heat up. Higher demand and a record of profitable lending at the banks now active are likely to draw in more banks that were scared off until now.
Already, lending standards have eased. A few years ago, builders that could get loans had to cover up to half the cost of their projects with equity from their investors. Today, they need to shoulder 25 to 30 percent of costs.
First Eagle Bank, a 28-year-old firm in northwest suburban Hanover Park with $417 million in assets, is lending to high-end homebuilders in Lincoln Park, as well as developers in other hot city neighborhoods like the Fulton Market area west of the Loop. CEO Andy Salk says land values in Lincoln Park are approaching $500 per square foot, right back to where they were before the crash. “It’s kind of hard to fathom,” he says.
Unlike many small banks, First Eagle continued to make construction loans through the downturn. But its balances fell from a peak of about $60 million in 2007 to $22 million in 2011. In 2013, balances stood at about $40 million, about halfway back to the peak.
At what point will lending standards make bankers pull back? Though most won’t say precisely, Republic Bank’s Mr. Sperling says his bank would slow down when lenders start requiring developers to cover just 20 percent or less of their projects’ costs.
Says Mr. Salk: “Everyone has their own risk tolerance level. Everyone looks at the market a little differently. . . . The tough thing for a small bank like ours is we don’t have a lot of other businesses.”
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