Less loans: Combination of banking issues and interest rate hikes has financial institutions slowing their efforts

The banking sector’s month of tumult is adding caution on top of caution. And that’s setting the stage for a subtraction of loans this year.

With interest rates ticking up and a new fixation on bank financial security, institutions are expected to hit the brakes somewhat on lending. Federal Reserve leaders have acknowledged as much, and expect tightened credit conditions could affect their plans for future interest rate hikes.

Elizabeth Magennis, president at ConnectOne Bank in Englewood Cliffs, said this was anticipated ahead of the recent industry headlines.

“Even as of last year, we were talking about a slowdown in lending due to interest rate hikes,” she said.

Throughout 2022, S&P Global Market Intelligence analysis pointed to a yearlong rise in the banking industry’s overall commercial and industrial, or C&I, loan balance.

Magennis isn’t optimistic about seeing the same type of consistent loan growth this year.

“However, I think when it comes to small business lending, we see a need to continue expanding lending relationships with clients who experienced expansion in their business in the last year,” she said. “We want to enable them to continue that growth in pockets of opportunities in today’s market.”

Jeffrey Rosenthal of Mandelbaum Barrett P.C. said that, besides lenders being shaken up by recent events and the specter of recession this year, there’s heightened anxiety about particular sectors of the economy.

“There has been a significant downturn in the volume of lending going on,” he said. “And, for sure, there’s not a lot of eagerness to jump into real estate deals.”

Rosenthal, who, among other titles, is co-chair of the Banking and Financial Services Practice at his Roseland firm, said one of the several issues involved in that is that the supply chain for construction materials hasn’t yet returned to normalcy.

“I’m aware of a small construction project laid out a year ago that’s now waiting for a circuit board before finishing its electrical work that won’t even be available for another year,” he said. “That’s a long time to be with a building partly built and have to carry cost and not have income coming from it.”

Banks with a large exposure to commercial real estate, and especially the office market, have been under some perceived stress due to declining market valuations. Banks have already reportedly conveyed to the Federal Reserve that they have tightened lending standards in that and other areas.

First Bank CEO Pat Ryan expects a scaling-back of lending activity across the board. But he also believes most banks are, regardless, in situations with decent credit quality and an appetite to lend.

“So, while I do think it’s possible that banks will be more cautious, at the end of the day, many banks only make money when they lend money,” he said. “So, I don’t expect any wholesale stoppage of lending markets.”

During any prolonged period of recession, he adds, lending does tighten up. Banks become more conservative.

Assuming that’s the stage the economy is quickly moving into, the circumstances are familiar.

“As I tell people, this is probably the fourth or fifth time I’ve been through a recession — and, every time, it’s a little longer and a little scarier,” Rosenthal said. “But, we all know how the movie ends. So, it’s just about riding out the cycle.”

Faropoint’s foresight

Even as lenders recoil during an onslaught of industry headwinds, borrowers are still looking to raise funds. And, no surprise, it’s not an ideal predicament to be in.

Idan Tzur. (Photos courtesy Faropoint)

At such a time, efforts to establish presecured funding sources and diversified banking relationships are literally paying off.

Faropoint, a private equity real estate fund manager that aggregates portfolios of last-mile industrial warehouses and distribution centers, is involved in a large amount of financing transactions every year. In the past three years, the firm has been involved in purchasing 3.5 million square feet of real estate in the South Jersey and Greater Philadelphia region and another 1.2 million square feet in North Jersey and the New York region.

In order to close so many deals in a quick time period, precommitted debt sources have been crucial, said Idan Tzur, Faropoint’s chief financial officer. The firm has syndicated loan relationships with several institutions, including Citizens Bank.

Itay Ron.

Not all firms operate in the same way. That’s giving them an edge today in competing on real estate deals, when some groups are losing out on deals due to sudden financing and liquidity issues.

“We’ve luckily prearranged financing with a high certainty in the pricing of debt,” Tzur said.

That gives sellers more comfort today in getting deals to the finish line, adds Itay Ron, senior vice president and Northeast market officer for Faropoint.

At the same time, more buildings are entering into the market today as potential real estate sales as a result of struggles some businesses are having in securing debt for their own operations.

“Every time something like this happens … it allows for certain deals at good pricing,” Ron said.