Credit unions: The newest institutional lender

The investor type is coming into its own as an alternative source of commercial real estate financing.

Credit unions – non-profit financial institutions that are owned by their depositors – are becoming a more important factor in US commercial real estate debt markets.

The shift comes as borrowers are seeking lenders which understand the specific nuances of a market that a larger financial institution, debt fund or other lender might not be able to process, David Robinov, a managing director at New York-based advisory Ackman-Ziff Real Estate Company, tells Real Estate Capital USA. And credit unions are looking to increase their market share of institutional real estate deals, he says.

“We’ve closed several successful financings with credit unions [where] we were very challenged to get bank or pension fund capital to make a loan on a property,” Robinov continues. “Often it can be difficult for institutions to get comfortable with a secondary or tertiary market, but credit unions offer a variety of benefits.”

The use of credit unions, an alternative to traditional banks, has been on the rise over the past two years. More than 4.4 million customers joined credit unions between August 2020 and August 2021 – an increase over the 4.1 million users who signed up during the same period one year prior, according to a report published earlier this year by the Washington, DC-based Credit Union National Association, a trade group representing US credit unions.

The total number of credit unions managing more than $1 billion in assets has also risen during this period, increasing from 272 in 2017 to 400 last year.

At the same time, credit unions have been increasing their loan originations. According to a March survey from the Washington, DC-based Mortgage Bankers Association, credit unions in the US originated $37.1 billion of new commercial real estate loans in 2021, a 44 percent climb from the previous year. By comparison, the trade group tracked $890.6 billion of total commercial real estate loan originations in 2021.

Growing opportunity

This growth has dovetailed with the changing needs of commercial real estate borrowers and lenders.

As an example, Robinov mentions the commercial mortgage-backed securities market, which has historically been very effective in providing debt for borrowers in smaller markets, primarily because the risk of any individual loan is diluted by being bundled with numerous other loans. But borrowers sometimes need more hands-on solutions, he says.

“Issues at the asset level become much more problematic for borrowers trying to work with unknown individuals at the CMBS loan servicer instead of the friendly person at the credit union that was part of the original underwriting and has stayed in contact as the relationship manager,” Robinov says. “This point was highlighted through the recent pandemic. For example, many tenants needed several months of rent relief, which usually requires lender approval for owners to modify leases with free rent periods.”

In addition to the local expertise and personal relationships, there are other benefits, Robinov says.

“Early prepayment of a CMBS loan through defeasance can be a costly and complicated process,” he says. “But with credit unions, there is no prepayment penalty. As one might expect, credit unions are designed to function differently than a Wall Street lending machine and they do not have the same pressure to close things.”

Alliant Credit Union, a digital business with more than 600,000 members and $15 billion in assets, has been expanding its institutional real estate lending and now has a portfolio of roughly $1.2 billion.

The Chicago-headquartered credit union is active in the multifamily, office, self-storage, industrial, retail and manufactured housing sectors. Charles Krawitz, Alliant’s senior vice-president and head of commercial lending, believes most credit unions have largely focused on smaller loans as his firm has been moving into larger transactions.

“We strategically decided to go into this business in a very different way than perhaps most credit unions, and assembled a team of highly experienced, knowledgeable and capable lending operators,” says Krawitz. “But most credit unions don’t play in the larger commercial real estate space. Routinely, we find ourselves looking at $40 million, $50 million, $60 million opportunities. And to do this requires a broader awareness of the capital market space.”

To access institutional-calibre borrowers, Alliant originates and then sells down participations in these loans. “This means we are able to spend more time structuring loans in terms of a first-loss position and trying to find ways to accommodate different risk preferences in the marketplace,” Krawitz says. “We are a lesser-known alternative to some of their go-to lenders being life insurance companies, governmental agencies or commercial mortgage-backed securities.”

Looking ahead

According to the Credit Union National Association, credit unions are growing in size and scope. The total number of credit unions managing over $1 billion in assets rose from 272 in 2017 to 400 last year and more growth is expected. This will translate into more institutional commercial real estate lending, particularly in today’s rising rate environment, market players say.

“I expect credit unions will have a growing share of the real estate lending pie as borrowers and brokers become more familiar with them,” Robinov says. “This is especially true in this rising rate environment. The credit unions’ supply of new funds and its need for a fixed return means they are less sensitive to rate fluctuations from Fed increases in lending rates.”