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Banks Remain Cautious As Rental Market Blossoms

By Greg Bordonaro

February 27, 2012

While developers continue to take an interest in apartment housing projects in downtown Hartford, finding the financing to get developments off the ground remains a challenge, as banks remain cautious about making big bets on speculative projects.

But bankers say the rental housing market continues to show signs of strength, and they are seeing more deal activity in Connecticut, even if it is not for ground-up development.

"Our underwriting is relatively conservative like the rest of the lenders," said Ned Handy, president of Citizens Bank and RBS Citizens in Connecticut. "The recovery is fairly slow and we are being careful. But I think things are stabilizing."

Handy said Citizens Bank has seen an uptick in business in Connecticut on the apartment front, particularly for renovations, refinancings and conversions.

The shift from homeownership to rental housing in recent years has largely been driven by the economic downturn and led to increased demand for apartments. Even in downtown Hartford, where the commercial vacancy rates are hovering around historic highs of 30 percent, the newest stock of apartment complexes in the city remain well occupied — at 90 percent or above — which has stoked interest in a further build out of the market.

Several projects are being talked about, including the conversion of the Sonesta Hotel into about 200 apartment units and a new 115 unit apartment complex at Front Street, but developers are having a tough time finalizing financing deals to get the projects off the ground.

It's likely the city and/or state government will have to offer incentives to get the projects across the finish line.

Overall, 270 market-rate units are expected to be added to the Greater Hartford market this year, according to real estate research firm Marcus & Millichap. The 270 units are expected to come from the completion of a single project in Vernon, known as the Mansions at Hockanum Crossing.

The planning pipeline, however, contains approximately 2,500 units, including 700 planned units in Hartford.

One of the challenges, says Handy, is that deals are being conservatively underwritten and highly leveraged real estate transactions are nearly non-existent.

"There is less debt and more equity in the deals," said Handy.

Citizens Bank is familiar with the downtown Hartford market. The Rhode Island lender, which is a subsidiary of the Royal Bank of Scotland, underwrote the $80 million construction loan for the Hartford 21 residential and retail tower on Trumbull Street that was built in 2006. The bank, however, has been forced to modify the loan on several occasions.

Handy said Citizens Bank remains active in the market and hopes to increase its commercial lending in Connecticut this year.

Nationally, market conditions improved in January for the multifamily industry across all areas including financing availability, according to the latest National Multi Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions.

The equity financing index moved up to 60 from 54, while the debt financing index increased from 70 to 74. Half of the survey respondents reported that now was a better time to borrow, up from 22 percent this time last year.

Meanwhile, development activity continues to increase in most markets, with just over half of survey respondents (53 percent) reporting a substantial pickup in land acquisition, lining up financing, and getting building permits, though not yet much in the way of actual construction starts. An additional 20 percent said that developers have been breaking ground on new projects at a rapid clip.

"Investors continue to view apartments as a preferred asset class in today's environment and long-term demographic changes favor rental housing," said Mark Obrinsky, NMHC's chief economist. "However, we expect the pace of improvement in transaction activity to ease somewhat moving into 2012."

Export financing fund

The U.S. Export-Import Bank has established a new $100 million revolving credit facility for small business exporters.

The Global Credit Express program, or GCE, will give small business exporters the opportunity to access a revolving line of credit of up to $500,000 for six to 12 months. During the program's pilot phase, an initial $100 million in financing will be made available through a select number of lenders nationwide.

Following the pilot, the Ex-Im Bank will evaluate the results of the direct loan program and determine whether to increase the available amount.

The product is designed to finance the business of exporting rather than specific export transactions.

Credit union merger

State banking regulators have approved the merger of two small Greater Hartford credit unions.

Enbic Employees Credit Union of Simsbury and the Windsor Locks-based 360 Federal Credit Union will now join forces.

Enbic Employees, which has $395,146 in assets and 282 members, lost $6,633 through the first three quarters of 2011. That is still an improvement over last year when the nonprofit cooperative lost $12,320 during the same time period, according to data from the National Credit Union Administration.

360 Federal Credit Union, with $193 million in assets and 16,344 members, posted $257,899 in net income through the first three quarters of 2011, compared to net income of $150,437 a year earlier, NCUA data shows.

Greg Bordonaro writes the Financial Sense column every other week. Reach him at gbordonaro@HartfordBusiness.com.