How US Bank is sharpening CRE lending into the back-half of 2022

Subramanian talks multifamily, industrial outlook as markets see paradigm shift.

US Bank is tailoring its commercial real estate lending priorities for the second half of the year to emphasize building larger relationships with repeat clients and focus on the strongest sectors as the rate environment and market conditions continue to evolve.

Sadhvi Subramanian, US Bank’s head of Commercial Real Estate for the East region, told Real Estate Capital USA the Minneapolis, Minnesota-based bank has seen its peers tighten lending criteria, but it’s keeping its own efforts active in multifamily and industrial markets where growth is still ongoing and sustainable.

“Our strategy is to build large relationships with a limited number of clients and we’re still continuing to do that – being trusted advisers to these clients and being meaningful partners,” Subramanian said. “We’re looking for people where we can have repeat business deals with good metrics and strong sponsors.”

Even as cap rates tick upward, US Bank is keeping its focus locked in on multifamily and industrial. The lender is seeing market participants dial back their aggressive stances on the sector and the coinciding bidding wars on every available project.

“[Funds and clients] are not reallocating their resources,” Subramanian said. “They are still continuing to grow in multifamily and industrial and other areas where we are seeing a lot of growth: single-family rental, manufactured housing, student housing, medical office.”

Subramanian said US Bank is looking to grow in Florida and is also looking to expand its subscription line lending, for-sale housing, a healthcare capital group and REITs. On July 19, the bank formally made its foray into Florida with a new CRE team to be based in the area.

As part of the Florida expansion, US Bank hired Pat Ramge from Wells Fargo’s CRE business to work as its Florida CRE market manager. Ramge worked at the San Francisco-based CRE lending stalwart for a decade before joining US Bank in June, and he brings three decades of total industry experience to the new role.

Atop Ramge, US Bank also hired Kim Abreu as a senior vice president after she worked for nearly 30 years at Bank of America where she was most recently senior relationship manager for the Charlotte-based bank’s CRE platform for its Florida-based real estate clientele.

Macro multifamily view

For US Bank, multifamily momentum has not been deterred by the broader economic volatility brought on by inflation and persistent interest rate hikes. Subramanian said the rising mortgage rates are likely to keep people in the rental bracket for a longer period than they had anticipated, in turn driving sustained demand for assets already short on supply in locales such as New York City.

“We’re extremely cautious about how much product is coming in the market,” she said. “If we’re looking at a construction deal, we are making sure there aren’t 20 other projects being constructed in the same area, making sure there is actually population growth and looking at the trends going forward and expected rent growth in those markets.”

With submarkets offering variation on a city-by-city basis, US Bank is similarly carrying caution into its underwriting. Most banks in the market are now underwriting to tighter structures, oftentimes needing a higher debt service coverage than was needed earlier on higher debt yields, in turn compressing leverage slightly.

US Bank was dealing on multifamily projects for 65 percent to 70 percent loan-to-cost ratios four to five months ago according to Subramanian and is now potentially coming down to 60 percent in some cases. “There will be a little bit of pullback in most banks in the market on construction,” she said.

Some of the bank sidelining can be attributed to rising construction project costs which have been adversely affected by material costs, lack of contractors, labor costs and broader supply chain disruptions. Subramanian said some projects may not go through with interest rates rising because they may not provide the correct internal rate of return anymore.

“We will see some fallout,” she said. “But I think if you look at strong sponsors, they will continue to develop; there is a lot of opportunity and we as an institution are not cash-constrained.” For US Bank, Subramanian said the current multifamily market provides an opportunity for the firm to build relationships with top clients.

Illuminating industrial

US Bank’s focus on industrial is narrower compared to its multifamily prioritization, but not lacking in complexity when it comes to bringing new business aboard in primary markets. 

Subramanian said the firm is seeing some deals getting re-traded just because industrial cap rates have seen an increase of 25 to 50 basis points. “What is kind of interesting is buildings are turning in industrial with short WALT, short lease terms tend to be more valuable than long term leases in industrial,” she noted. “The reason for that is people believe that industrial rents will continue to rise.”

As an example, Subramanian said if a buyer is acquiring an industrial asset with all cash at a 3-cap rate and the interest rate on the loan is 4.5 percent, they are then letting the leases turn to bring up the NOI and then get a higher leverage, especially in a refinancing situation. She said the strategy has created an interesting phenomenon wherein industrial assets with shorter-term leases tend to trade higher than industrial assets with longer-term leases.

There is still sizable growth to be realized in the industrial sector, Subramanian noted. The disruption to the global economy stemming from the onset of the covid-19 pandemic has shifted industrial tenants from operating on “just in time” models to “just in case” to avoid further disruption.

US Bank has also keyed in on cold storage as a potential area for high growth, especially with the uptick in online orders and digital grocery shopping.

Office outlook

The office sector is one area where the pandemic-induced paradigm shift has created a murky picture of what the future looks like for assets outside the upper echelon of quality.

Subramanian said even while high-end, Class A product gets leased up, much of the sector’s longevity depends on people going back to work on a five-day basis, incentive structures from employers to produce such a return and what office needs look like going forward as a result.

The trends are not yet clear from US Bank’s perspective. Tech companies, as one of Subramanian’s examples, consumed and bought up a lot of office space but it is unclear whether they will continue doing so if they are not hiring at the same rate they were during the expansion periods.

For a massive office market such as New York City and other major US metro areas, Subramanian said there are still questions around what a return to regularity looks like and US Bank will be moving with caution when it comes to any deal in the sector because of the inherent risks.

In cases where office buildings are leased up on a long-term basis, rents are being paid but the asset is empty because nobody is coming in, US Bank is approaching the developer and asking if they want to convert such buildings for alternative uses. “I think a lot of that will happen, especially for the older buildings,” Subramanian said. “This doesn’t mean office as a product type is going away – it’s still essential, it’s still needed – it’s just going through a change.”

Though future trends for the sector are not clear yet, Subramanian said older, non-amenitized office buildings are no longer wanted en masse and sit in a tough spot.