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Baltimore Business Journal: Apartment Deals Lead Lending Revival

January 27, 2012

Toby Bozzuto said he couldn’t have closed on $279 million worth of financing for new apartment construction three years ago.

Securing that kind of funding during the depths of the recession wasn’t possible for Bozzuto Development Co. or many other firms. That led to development coming to “a screeching halt” in 2009, Bozzuto’s Development Co.'s president said. Banks began walking away from commitments following the weakening of the economy. As a result, few new apartment developments broke ground.

But as 2011 came to a close, Bozzuto said bankers became more willing to finance major apartment projects. Bozzuto apartment developments in Fells Point, Washington, D.C., and Anne Arundel County all were financed between Oct. 21 and Nov. 4.

Bozzuto said apartments that come on line between now and 2014 will deliver much needed supply in a market that is in hot demand.

“We went out looking for apartment equity with the thesis nothing had been built since 2008,” he said.

Baltimore bankers say Bozzuto’s experience is expected to be closer to the norm for 2012 after seeing commercial real estate lending plummet since the recession started. They predict as much as a 10 percent increase in the value of commercial real estate loans in 2012 compared to 2011.

Large apartment projects by developers looking to capitalize on lower interest rates and dropping vacancy rates will drive the recovery. Bankers said local demand for rental properties has convinced them to finance those projects.

“Most of the banks are back looking for business and are being fairly aggressive,” said Mike Wallace, who oversees M&T Bank’s commercial real estate lending in Baltimore.

Banking on demand

Maryland banks steadily added loans for apartments, townhomes and condominiums to their books in 2011. The value of those loans jumped 21.6 percent between the third quarter of 2010 and the third quarter of 2011, according to the most recent Federal Deposit Insurance Corp. data. It rose 12 percent between the second and third quarters of 2012.

That has bankers believing apartment projects are expected to be the hot development for 2012 in the Baltimore area, Wallace said. Developers are targeting areas like Fort George G. Meade, Aberdeen Proving Ground and the Interstate 95 corridor where new jobs and residents have flowed in with military relocation efforts. All of that activity could result in what Wallace describes as an “overheated market” as developers take advantage of lower interest rates as well as lower prices for buildings on the market.

Interest rates for commercial real estate properties are just under 4 percent, down from between 6 percent and 7 percent in 2009 and 2010, according to the Real Estate Capital Institute. In 2008, interest rates were between 5 percent and 6 percent.

Meanwhile, average asking rents climbed 2 percent to $1,095 in the third quarter of 2011 over 2010 prices, according to the Mortgage Bankers Association. Add on vacancy rates falling 1.5 percent to 2006 levels — 5.6 percent — and the market is ripe for new apartment construction.

Developers with money on hand, and successful track records, are getting financing, said Greenberg Gibbons Commercial CEO Brian Gibbons. That wasn’t the case in 2008 and 2009. He said quality projects are now getting the green light from banks as well as low interest rates.

Greenberg Gibbons has several major projects under way including the redevelopment of Laurel Mall, which will have luxury apartments.

“It was the nature of the business, so we waited it out,” he said.

Breaking ground

An improving economy and an increase in bankers looking to make deals helped drive up Greater Baltimore construction spending by 6 percent for a total of $2.4 billion in 2011 compared to 2010, according to McGraw Hill construction. Bankers’ optimism has also been bolstered by the return of investors buying bundled mortgages. The practice essentially ended during the housing market collapse.

As investors step up to buy commercial mortgages, bankers see an opportunity to increase their lending while minimizing the risk. But for bankers to be confident about the loan, developers will need to bring up to 30 percent of the project’s cost to the table. The days of only needing 5 to 10 percent are gone, said Howard Bank CEO Mary Ann Scully.

Bozzuto is taking advantage of the current lending climate. He is building where he believes there will be job growth such as downtown Washington, D.C., Northern Virginia and downtown Baltimore. He said his firm is also targeting areas where people are looking to rent instead of purchasing their own homes.

The company broke ground on three projects in the fall, including Union Wharf, a $72 million residential and retail development along the Fells Point waterfront.

Bozzuto’s financing success is following a national trend. Kiplinger’s Personal Financial magazine predicts a 12 percent increase in commercial lending in 2012.

Even with an uptick in local activity, the kind of growth Kiplinger envisions isn’t realistic for most banks, said Chris Holt, managing director of commercial banking at Susquehanna Bank. Holt expects a more modest increase in the total value of commercial real estate loans Susquehanna Bank issues this year.

“We expect to do between 5 and 10 percent, which will take a significant amount of growth,” he said.

In the last two years, the bank’s commercial real estate lending rose less than 5 percent, mainly due to a decline in construction financing, Holt said.