With lower lease rates and the Marcellus Shale boom, commercial real estate in the tri-state footprint is looking up. Greg Sipos, senior vice president, corporate banking manager, at First Commonwealth Bank, has been encouraged by recent commercial real estate activity in western Pennsylvania, as well as in Akron, Columbus and Youngstown, Ohio.
“When I say those names, you’re not like, ‘Wow, that’s a great place to go,’ but, you know what, it really is these days,” Sipos said. “They’ve had some real estate growth and nice projects in those markets. It’s well ahead of the rest of the country, and I’m encouraged by the amount of activity in the last six months.”
Smart Business spoke with Sipos about the state of the real estate market and how bankers are getting back to the fundamentals of lending.
How does the current commercial real estate market look?
When you look at this market, there was limited asset appreciation over the years, and the borrowers never overleveraged the way that it happened everywhere else. People built equity in their real estate by normal amortization of loans. So if they had a 15-year loan and they paid it back over 15 years, they built equity in their real estate. Western Pennsylvania has always been known for that, as opposed to the rest of U. S., where asset appreciation was due mostly to the perception of overall growth through demographics. Problems occurred because assets were overleveraged in a lot of ways. Conversely, Pittsburgh went from being one of the worst real estate markets in the country to being one of the best in the span of three years because of the steady equity growth.
The mood is very strong in this area with some game changers. The growth in the Marcellus Shale area and the oil and gas industry in western Pennsylvania has brought strength to the market through all aspects, from multifamily to the retail businesses and hospitality industry. Another thing that’s happened in the central business district, as far as Pittsburgh is concerned, is a lot of large firms headquartered in other cities realized that the rent per square foot in Pittsburgh is much more reasonable than the rent per square foot in Manhattan and other comparable markets. Companies are relocating to the central business district or to Pittsburgh in general because of favorable lease rates.
Hospitality is known as a good indicator for the economic health in commercial real estate. What is the outlook in the tri-state area?
Yes, hospitality is an indicator, and it is doing very well now. Western Pennsylvania had a lot of older product, but now a lot of newer product is coming online around Pittsburgh and in some of these smaller towns. Morningstar, a financial-data firm, reports that — at least for the next three or four years — it’s definitely an industry to lend in.
When banks make a loan for hospitality, they look at what the drivers will be — why will people be coming and staying here. A lot of the hospitality that got into trouble was in resort areas because, during recessionary periods, people tend to forgo vacation. The hotels that are successful are the ones that have many drivers. For example, is it a flagged property? It’s much easier in today’s market to get a loan for a Marriott, a Hilton, a Holiday Inn or a Choice product because of the reservation system. One hospitality loan was recently done in Latrobe, Pa., the home of professional golfer Arnold Palmer. There’s a lot of industrial around, it has a resort element because of Idlewild Park and the Laurel Highlands, it has St. Vincent College, hospitals, and it has Mr. Palmer’s name attached to it, which results in reciprocating agreements between Latrobe and Florida. So there are drivers for occupancy. You don’t want to open up a hotel where you have to bet on tourism or one industry.
How have lending practices changed, and how much emphasis is being placed on equity?
The one thing that’s different now — that hasn’t come back the whole way — is the lending rules were generally much less stringent pre-recession. Post-recession, it’s back to the fundamentals. When you want to buy something, you need to have a down payment for it and you need to have cash flow to repay it.
Banks are requiring down payments. As a business owner, when you are thinking about making that expansion or when you’re thinking about buying a new building, you need to make sure you have the right amount of equity to go into the project. The bank is no longer willing to take the equity risk it was taking pre-recession.
Having equity shows you can afford it and shows your commitment to the project. If you are able to buy real estate without putting equity into it, it’s much easier to walk away. Some people might be interpreting that as unfair, but it’s not really unfair, it’s just the way it’s always been done prior to the years leading up to the recession.
It’s important to remember there are differing ways to find equity. These include:
- Equity through government programs.
- Investors on the sidelines looking to invest.
- Personally guaranteeing loans, a practice people were always comfortable with. Borrowers have to be willing to guarantee the indebtedness, maybe by pledging other equities in other properties as collateral.
Greg Sipos is a senior vice president, corporate banking manager, at First Commonwealth Bank. Reach him at (724) 463-2556 or [email protected].
