After fleeing the construction market after the housing bubble burst, bankers are backing residential projects again.
Twin Cities banks are cashing in on the surge of multifamily construction, jostling to do business again with real estate developers.
It's a sharp twist from the post-crash years when toxic concentrations of commercial real estate loans brought down so many small community banks and larger banks all but pulled out of construction and development lending. Construction and development lending at banks has been contracting for years, although it wasn't apartments that burned them. Now, eager to earn some money on their stash of cash and with demand for apartments hot among renters and investors alike, banks are stepping back into the development arena.
The apartment boom -- more than 14,000 units have been proposed or are under construction in the Twin Cities, according to researcher Mary Bujold -- is a bright spot in loan demand for banks.
It's a borrower's market, said veteran apartment developer Stuart Nolan, founder and chairman of Bloomington-based StuartCo.
"There is plentiful money available these days for construction loans and permanent loans," said Nolan. "Apartments are now the darling of the real estate investment community. Years ago, we were the ugly duckling. Things change."
The local competition is mostly for "A" loans, local industry players say, and underwriting is strict. The banks insist they're watching absorption rates very carefully, alert to the potential for overbuilding in certain pockets such as downtown Minneapolis.
Competition is robust
U.S. Bank's market-rate multifamily construction business is up about 10 percent from last year, according to John Besse, the bank's Midwest regional manager for commercial real estate. That includes loan commitments that aren't funded yet. And that's just the market-rate apartments. The bank expects its volume of affordable-housing loans in the Twin Cities to double this year.
Among U.S. Bank's recent deals is Kraus-Anderson Realty Co.'s rehab of the historic 430 Oak Grove office building in Loring Park that will convert it into 75 luxury apartments. U.S. Bank also is working with Michigan-based Village Green Properties, which is converting the Soo Line Building in downtown Minneapolis into apartments.
The apartment boom is also boosting volumes at rival Wells Fargo & Co., another multifamily fixture.
Demand for multifamily, which started more than a year ago, is "ramping up even stronger" now, said Wells Fargo senior vice president Glenn Sansburn, manager of the bank's Minneapolis commercial real estate group. The 222 Hennepin apartment complex going up on the old Jaguar site in downtown Minneapolis is one of Wells Fargo's more recent deals.
'Magical financial dust'
Newer players are getting in on the action. St. Paul-based Bremer Bank historically has done very little lending for new apartment construction. Terry Kriesel, the bank's senior vice president and manager of commercial real estate, estimated Bremer probably did all of one multifamily deal last year. Now it has five or six in the pipeline.
"It's had a significant impact on our current year's success, there's no question about that," Kriesel said.
Bremer Bank was one of several banks vying to finance the construction of Track 29 City Apartments in Minneapolis' Uptown neighborhood. The $38.5 million complex under construction at Bryant Avenue S. and the Midtown Greenway will have 198 units, a rooftop garden, ground level zen garden, salt water lap pool and a children's play area.
Ross Fefercorn, principal of Minneapolis-based RMF Group, co-developer of the project, said Bremer offered them "slightly more aggressive terms" for the $29 million loan.
"They sprinkled a little more of the magical financial dust on it than the other guys," Ferfercorn said.
Banks typically focus on construction loans. The common "construction mini-perm" package typically includes an 18-month interest-only loan with another 12-24 month interest-only loan for the lease-up phase of the project, and then an option for a term loan up to seven years or so.
Banks typically want out after that, and there's an array of other parties offering permanent financing to take them out, from Freddie Mac and Fannie Mae, the Federal Housing Administration and Housing and Urban Development (HUD), to institutional investors such as pension funds and real estate investment trusts.
"Investors are very eager to buy new construction multifamily even before the properties being leased up," Kriesel said.
Nationally, HUD is also a major player in new multifamily construction loans, but a backlog at the agency is helping drive more business to banks, according to Kriesel.
"They are so swamped with multifamily and other things that they're unable to meet the demand in the marketplace at this point in time, so banks have been more active," Kriesel said.
Dave Rasmussen, senior vice president of Grandbridge Real Estate Capital's Minneapolis office, agrees. When the banks pulled back from the market during the financial crisis, HUD was the only game in town. And it's well-known for its labyrinthine loan process, Rasmussen said.
The Excelsior Group, a real estate company in Minneapolis, recently used Grandbridge to arrange a HUD loan to finance the Flats at West End, an upscale 119-unit building in St. Louis Park.
But the deal took 18 months to close. "It's a perfect product, it's just a very tough process," said Rasmussen.
How long will the good times roll? Sansburn at Wells Fargo said that given the Twin Cities' low 2.7 percent vacancy rate -- 5 percent is considered relatively balanced -- there's plenty of demand to absorb the apartment supply that's currently under construction. But in the not-too-distant future, there will have to be much stronger job growth to support further development.
"Beyond 2013 is where you really have to look, because the backlog of multifamily projects that are being proposed is just enormous, and they're all not going to work," Sansburn said.
Jennifer Bjorhus • 612-673-4683