Independent Banker - August 2022 - 26

PORTFOLIO
" I think our volume will continue
to be up in 2022. I just wonder how
much higher [construction] costs can
go, " says Jennifer Cooper, senior vice
president and commercial real estate
lending manager at $6 billion-asset
Bankers Trust in Des Moines, Iowa,
which also has branches in Ames,
Iowa, Cedar Rapids, Iowa, Sioux
Falls, S.D. and Phoenix, Ariz, with a
lending production office in Omaha,
Neb. As an example, the average total
cost to build an industrial warehouse
jumped 21% last year, according to
JLL. Eventually, higher costs need to
be passed down the food chain from
tenants to consumers, Cooper says.
Sharpening pencils
Rising construction costs, inflation
and the rising interest environment
are all contributing to a fluid market
and challenges in underwriting loans.
" It is difficult to determine what an
appropriate interest rate is when
underwriting the takeout financing, "
says Schott. It is impossible to predict
where rates are going tomorrow, let
alone predicting what they will be in
18, 24 or 36 months. "
Lenders at Sandy Spring Bank have
also started to see borrowers request
to increase loans to cover higher costs.
In those scenarios, Schott adds, it is
important to be sure those loans still
underwrite with an increased loan
Industrial space in high demand
Despite rising costs, demand for industrial space has exploded
along with growth in e-commerce. Rents for industrial projects
in the Midwest that were typically between $3.50 and $4.50 per
square foot have jumped to well above $7, notes Jennifer Cooper,
senior vice president and commercial real estate lending manager
at Bankers Trust in Des Moines, Iowa. In other high-growth markets
such as Arizona, rents have surged past $10 per square foot. Strong
occupancies and rent growth are fueling building activity, particularly
for warehouse, logistics and " last mile " delivery locations.
On the multifamily side, some apartment developers are struggling
to make the numbers pencil out due to higher construction and
land costs. " The Midwest doesn't have the massive income gains
that the coasts are seeing, " Cooper says. " So, the issue that we're all
running into is that with costs the way they are, the ability for people
to be able to pay higher rents to support construction costs is a
huge challenge. " For example, some apartment developers in rural
Iowa were projecting construction costs as high as $285 per square
foot, which contributes to a financing gap. Most of the apartment
construction loans Bankers Trust originated last year were out of its
Phoenix office for projects in Arizona and southern California.
amount and to structure the increase
such that the borrower is sharing in
the cost increases by way of injecting
additional equity.
Bankers Trust originated about
$500 million in construction loans in
2021. About 30% of those loans were
for industrial, including both spec and
build-to-suit properties.
BIG STAT
17.1%
Year-over-year rise in number
of multifamily building permits
issued, March 2021 to March 2022
Source: National Association of Homebuilders
" Spec can be a bit of a dirty word
in lending, but we're doing those
projects with developers who have
pretty substantial balance sheets
and the ability to cover costs if there
are increases, " says Cooper. " So, our
underwriting is back to the basics
of whether the client has their costs
locked down, and if they don't, what
level of cost they can absorb without
damaging their financial position. "
Bankers Trust has also developed
an internal underwriting model with
a sensitivity component that models
different scenarios, such as how low
rents can go or how high interest rates
can go before the loan breaks even.
" At the end of the day, it's all about
relationships and that borrower's
financial strength. So, we really spend a
lot of time looking at the borrower's net
worth and liquidity and experience, "
says Cooper.
Finding a competitive edge
Although banks have traditionally
dominated the construction lending
space, community banks do face stiff
competition. There is a lot of liquidity
in the market, and banks are competing
with life insurance companies, debt
26 Q ICBA Independent Banker Q August 2022
Independent Banker - August 2022

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