Community banks across the nation are feeling the pressure of a deteriorating commercial real estate market, but local bankers throughout Connecticut are sensing this may be the time to move ahead aggressively to expand their businesses.
Connecticut’s banks are holding mortgages on $1.8 billion in troubled commercial properties — the majority in Greater Hartford — but local financial experts see more of an opportunity than a threat.
“As larger regional banks exited the commercial real estate market, it has provided opportunities for smaller banks to look at deals we would not otherwise look at,” said John Roman, president of the Connecticut Community Bankers Association.
Those deals include financing for borrowers who own occupied strip malls and have other income properties and franchise start-ups, according to Roman, who is also president of Naugatuck Valley Savings and Loan.
Roman’s bank also has seen an uptick in its lending activity related to the Small Business Administration’s 504 Loan Program for borrowers who need “brick and mortar” financing.
“We’ve seen about a 25 to 30 percent increase in the number of deals we’re doing in the program. For example, the bank finances 50 percent, the SBA’s program covers 40 percent and the other 10 percent comes from some form of owner equity,” said Roman. “It allows us to limit our risk and still be able to provide opportunities to the local community.”
Naugatuck Valley Savings and Loan has an even mix of commercial real estate and consumer loans, he said.
Community banks derive funds from — and lend money to — local consumers and small businesses in the region and generally individual banks hold less than $1 billion in assets.
“That’s not to say we’re writing every deal that we see, but we’re definitely taking a long, hard look at the ones with strong fundamentals, current appraisals, good cash flow and credit worthiness,” said Roman.
John Harding, a professor of finance and real estate at the University of Connecticut’s School of Business, sees an advantage here for community banks over their larger counterparts.
“Those smaller commercial loans are historically strong for community banks,” said Harding. “Because they know the local market well and often know the borrower, they are frequently in a better position to make good judgments with respect to these kinds of loans.”
“The community banks have flexibility to tailor the loan to the needs of the borrower more than a big bank does,” said Harding. “Smaller banks are more understanding of the unique circumstances a borrower has… You can sit across the table from a community bank and negotiate terms and pricing.”
Executives at Rockville Bank are concerned with the softening market, but they are also actively “seeking new relationships with commercial borrowers,” said Mark Kucia, senior vice president, commercial banking officer.
“There is a lot of uncertainty right now and businesses are less willing to expand. But we have to find the lending opportunities and be willing to work with our borrowers,” said Kucia. “We’re in a jobless recovery that is going to continue putting pressure on commercial real estate values and business cash flow until we see corporations hiring again.”
There are currently 105 troubled commercial properties worth $1.8 billion in Connecticut, up from 36 struggling properties worth $463 million at the end of 2008, according to Real Capital Analytics. Greater Hartford accounts for 52 of those struggling properties worth $627 million compared to 18 properties worth $182 million in December 2008, according to the research firm.
There are 46 troubled commercial properties in Stamford worth $1.1 billion, up from 14 properties worth $197 million in 2008. The other seven struggling properties — worth $132 million — are located throughout the state. In December 2008, that figure was a mere four properties valued at $84 million.
The national figures are even more frightening.
An estimated $1.4 trillion in U.S. commercial mortgages will mature between 2010 and 2014, half of which are “under water,” meaning the borrower owes more on the loan than the property is worth, according to a recent report by the federal Congressional Oversight Panel.
Commercial property values have plummeted 40 percent since peaking in 2007; high vacancy rates and low rental rates continue to drive property values downward. The commercial real estate market is unlikely to recover before 2012, experts predict.
The U.S. banking sector could incur as much as $300 billion in commercial real estate losses, enough to cause more than 700 banks to fail, in a worst-case scenario.
The Federal Deposit Insurance Corp. has already shuttered 41 banks this year and announced it had placed more than 700 lenders on its list of “problem” banks, the highest number since 1993. The FDIC does not disclose which banks it considers at risk.
Last year, the regulatory agency closed 140 failed banks and is on pace to do the same this year.
Since the housing market started to collapse in 2007, the FDIC has closed 209 banks with $570 billion in assets. There have been no bank failures in the state since the FDIC took over Connecticut Bank of Commerce in Stamford in 2002.
