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Mike Mallaber Featured in RBJ Article

March 6, 2019
Michael S. Mallaber - Senior Vice President, Group Manager, from our Commercial Services team, was featured in a Rochester Business Journal article that discusses the commercial lending outlook for the greater Rochester area. Read the full article below.
M Mallaber

Commercial lending outlook ‘cautiously optimistic’ in Rochester
By: Rochester Business Journal Staff - Mike Costanza
Published: March 4, 2019

Local banks say the Rochester-area market for commercial real estate (CRE) loans is in good shape.

“In terms of loan originations and loan production, we’re really as busy as we have ever been,” says Richard Mueller, group manager of commercial real estate lending at M&T Bank.

The future of the market also appears to be fairly rosy, though there are some challenges.

Representatives of some of the banks that serve Greater Rochester say the current state of the CRE loan market arises from a number of factors, starting with the overall stability of real estate values.

“You travel to Florida, you travel out west, you see these big dips in the market, or the market’s up 30 percent, as far as appraised values, year-over-year,” says Michael Mallaber, senior vice president, commercial services, Canandaigua National Bank & Trust.

In contrast, the appraised values of local properties vary much less dramatically—they might increase by no more than 1.5 percent year-over-year, for example.

“That gives the banks in this area, this region, comfort in lending, because they’re not waiting for the next big shoe to drop,” Mallaber explains.

A bank’s portfolio of loans might include those for several types of projects.

“I think the traditional property types—apartments houses, warehouses and industrial, hotels—are still attractive assets to the banks, and banks are booking loans secured by those sorts of properties,” Mueller explains.

Loans for new construction—especially of factory buildings—aren’t as common as they once were.

“I don’t think there’s a need for as much new manufacturing space, because there’s still a lot of excess Kodak space on the market,” Mueller says. “When you look at Elmgrove Park and the Eastman Business Park, there’s still space available.”

At the same time, local CRE loan providers have increasingly helped fund other types of projects.

“There has been a lot of multifamily residential development in the past several years,” Mueller explains. “We see a lot of that in the central business district.”

The old Midtown Tower, for example, gained new life in part through a $36.5 million M&T Bank loan to Buckingham Properties.

“That used to be an office space and retail,” Mueller explains. “The developers took it down to the steel to get rid of the asbestos, and everything else.”

Buckingham Properties transformed the structure into Tower280, which offers luxury apartments, office and retail spaces and a restaurant in the heart of downtown Rochester. Since 2000, a total of 49 downtown commercial buildings have been converted, or are being converted, to residential or mixed-use, according to the Rochester Downtown Development Corp.

If the Rochester area’s big box stores continue to suffer at the hands of Amazon and other online sales outlets, more and more banks and other lenders might find themselves financing redevelopment projects in the coming years. Circuit City and other retailers that once had stores in the area are no more, and Sears Holdings, which has declared Chapter 11 bankruptcy, recently announced that it plans to close 80 Sears and Kmart stores, including the Sears store at Marketplace Mall.

Though redevelopment projects offer opportunities to banks and other lenders, that kind of financing calls for creativity. Say a developer plans to renovate, repurpose and rent out a former retail property.

“If that space … is being repurposed to a call center, for example, it’s a different use,” Mallaber says. “We’ve got to buy into the projection that the developer understands the market, and has put together a well-thought-out strategic plan to repurpose these buildings.”

In cases like that, a business plan that involves bringing in a diverse group of tenants could be a plus.

“If you have … more tenants to manage, the expenses might be a little higher, but your risk of losing big cash flow by one tenant moving out is less impactful,” Mallaber explains.

The applicant’s characteristics and history are particularly important.
“We get very involved with our developers and owners on their background, their management ability, their understanding of the market,” Mallaber says.

Applications for commercial real estate loans are also considered in light of the markets for the properties involved.

“Banks do underwrite carefully to make sure that the supply and demand characteristics of the market are solid, so we aren’t creating a lot of speculative property in any of those segments,” Mueller explains.

Banks also have to take into consideration the effects of changes that could occur in a given project and the economy before a loan comes to term. The Trump administration’s trade war will boost the costs of imported goods—including building materials—if it continues, and could affect the CRE loan market.

“We hear … from our current clients that the cost of construction keeps going up,” Mallaber says. “If building costs and materials go up to a certain level, and the rental rates that you can charge your tenants gets capped, these projects do become not as feasible to build.”

The presence of other sources of funding in the Rochester area also affects the way a bank might see the CRE loan market.

“There are a lot of banks and non-bank lenders that we compete with,” Mueller says.

Despite that competition, and the CRE loan market’s other challenges, local bankers view the coming years positively. Mallaber pronounced the Canandaigua National Bank to be “cautiously optimistic” about the immediate future.

“I would envision the next five to 10 years to remain stable,” he says.

In the view of one commercial real estate developer, the CRE loan market has been a strong source of capital—at least, for his firm.

“We have … a strong reputation, never missed a loan payment, and our projects have always succeeded,” says Richard Finley, president of Buckingham Properties. “We never really ran into an issue with access to capital from traditional lenders.”

Mike Costanza is a Rochester-area freelance writer.

To view the full RBJ article, click here.