Banks are becoming increasingly skittish on office lending, and while some credit unions share the same concerns, they also see opportunities as the banks pull back.
Wells Fargo was one of the latest to
The office market "continues to be weak" in many cities, Wells Fargo's Chief Financial Officer Michael Santomassimo said during a second-quarter earnings call Friday.
Those cities include Philadelphia.
And Citadel shares those concerns when looking at dedicated office space, said Phil Sutliff, Citadel's head of business banking.
But Sutliff said the $5.8 billion-asset credit union has found an opportunity within the current challenges surrounding that lending line.
"Our primary focus centers around existing businesses with a strong financial track record looking to secure a permanent location or expand their business," Sutliff said. "In that sense, we are able to connect strong buyers to these vacant properties for immediate use."
Sutliff said Citadel's sweet spot for those deals is typically below $10 million.
Including owner-occupied commercial real estate, Citadel expects to cross $500 million of funded commercial loans during the next several quarters with a percentage of that exposure in office real estate.
Still, challenges in that space abound. The U.S. vacancy rate across the office sector increased from about 12% at the start of 2022 to 17% early this year, according to data provider IBISWorld.
"A lot of banks are going to have to step up disclosures about their office exposure," Chris Marinac, the director of research at Janney Montgomery Scott, said in an
Greg Kidwell, president of Pathways Financial Credit Union, a $618 million-asset lender in Columbus, Ohio, said the institution also has some concerns about
But the credit union sees lending opportunities with smaller projects of typically below $1 million.
"I think that all commercial lenders in general are worried about commercial office," Kidwell said. "When you look at what happened due to the pandemic, where remote work has become entrenched and vacancy rates are extremely high in that sector as a result, that is a problem because nobody knows when and if that is going to change."
And while the problem is somewhat masked by long-term leases in non-owner-occupied commercial offices, Kidwell said those leases will expire at some point, and that could be a big problem for the financial services sector.
"My overall point is that we are extremely selective when it comes to office right now. If we do office it is going to be owner-occupied single tenant, or owner-occupied medical or dental offices or veterinary clinics," Kidwell said.
Pathways has about $11.5 million of its commercial portfolio in offices, with the sector evenly divided between non-owner-occupied, non-specialty office properties and more specialized single-owner properties.
Pathways can differentiate itself from other lenders on loans between $500,000 and $1 million because those loans are more important to Pathways than they are to larger lenders, Kidwell said.
"We try to establish a very close relationship with all of our business members, not only on the lending side, but also on the deposit side and transactional side as well," Kidwell said.
The typical credit union business loan is for a small business with equipment needs or start-up operational costs, and runs closer to $200,000 than $20 million, said Dennis Dollar, a credit union consultant and former chairman of the National Credit Union Administration board.
Therefore, any time banks leave the space of the smaller business loans, it opens the door for credit unions — particularly those over $500 million of assets who have the scale to compete and the expertise to manage in the commercial lending space, Dollar said.
Sutliff said one of Citadel's most significant advantages lies in its approach to commercial real estate loans.
Unlike traditional banks that often impose three-to-five-year prepayment penalties, Citadel offers penalty-free loans.
"This major advantage can save our members thousands of dollars, making our services even more beneficial and cost-effective," Sutliff said.
Citadel also onboards businesses in specific industries including medical professionals, manufacturing and information technology that have annual revenue between $3 million and $25 million.
Many of those businesses require a physical location for in-person interactions and operations, Sutliff said.
In the past, those businesses often leased office spaces, but due to the current economic conditions, many commercial properties are now vacant and thus available at lower prices.
The situation has opened up new possibilities for those businesses to purchase commercial real estate and adapt it to their unique needs, Sutliff said.
"For instance, we've witnessed a veterinary practice buying a vacant bank branch and transforming it into their new clinic," he said. "This shift in the real estate market has provided excellent opportunities for essential businesses to invest in permanent locations or expand to new markets by acquiring these vacant properties."
