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Commercial R.E.: What's Hot, Not
Citizens' Palinkos sorts out trends in industrial and investment real estate in the state
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Business New Haven
7/7/2003
By: BNH
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Senior Vice President Michael Palinkos heads up the commercial real estate lending division of Citizens Bank of Connecticut. Before coming to Citizens six and a half years ago he worked for the Bank of Boston. We asked him for some insights into the current commercial and industrial real estate market in Connecticut.
How robust is the rental market for apartment complexes and buildings?
The apartment market in general has been very strong. We have lent on a fair amount of property in New Haven and New London counties and to a lesser degree, Fairfield and Hartford counties.
Is there any indication of an apartment market bubble bursting?
No, there is not a lot of anxiety over the market imploding. We do hear a lot of conversations and have some internal concerns about the residential market. And although it is a small percentage of my business, we look at and finance subdivisions that are indirectly the residential market. We [Citizens' commercial department] don't provide the end loans to the homeowner, but lend on the infrastructure and in many cases, lend on one or two specs that might come on into that subdivision.
Are developers building condominium complexes or doing conversions right now, and if so are they getting financed?
They are, but I am somewhat surprised that we haven't seen a resurgence of condos and condo conversions because that was real hot 15 years ago. In Connecticut we haven't seen the number of conversions that maybe this very hot residential market might [justify]. There are a lot of people out there with some very sore bottoms from those days.
How do banks look at conversions?
We would consider them; we've seen a couple of very small ones that don't add an impact to the portfolio, but I think we would cautiously look at them.
How often do you see commercial condos used for office space?
We see very few of those as new projects. We do come across quite a few that were done ten years ago. I don't see that as a primary project. There were some problems with commercial condos because they had restricted functionalities. If you were an owner of a commercial condo unit, and you were blessed with growth, you were out of luck as far expansion or relocation. If it was a typical commercial building and the [person] next door moved out, you would have the opportunity to relocate in adjoining spaces or elsewhere in the building. With the condo, that became more difficult.
How is the market for multi-tenant industrial property?
Of all the product types, light industrial property is probably the weakest of the markets. I don't mean that there are huge vacancies or problems, but it has not been as active as some other markets. On the other hand, the retail market has been extremely busy, both from refinancing and new products. Residential with apartments and subdivisions, and office and medical [buildings] are very active. The industrial side has seen fewer transactions.
What types of retail buildings are generating the most activity?
Big-box users [like] Rite-Aid and Walgreen's have been very active. We get involved in a lot of 'mini-perm' loans with that type of facility. Mini-perm is a construction loan that converts to a one- or two-year permanent deal, and in most cases a large life company or the capital market usually takes us out. Developers for sites such as Walgreen's approach us for funding and we lend to them. Walgreen's could either purchase it from them upon completion or enter into a long-term lease with [the bank's] customer.
How are the businesses doing in small shopping areas and strip centers?
We have been very active in that market. Generally, we look very closely at rent rolls. Some of the mom-and-pops you necessarily can't understand their financials, but we look toward the borrowers themselves to make sure they have reasonable experience. We also look at the track records of the center, what the turnover looks like and how long the leases are. [The businesses] are successful because consumers are still spending a lot of money and the retail tenants seem to be making a decent profit. There has been a demand by shopping centers to expand, to reposition and an insistence [from retailers] that they are in a center that looks good and shows well.
What is a typical term for a shopping center?
Generally speaking, most deals are five- to ten-year terms, based on a 20-year amortization schedule and a matching Treasury product, with an average spread of 150 to 250 basis points over that matching Treasury product.
Do you see any activity in downtown New Haven?
We have been very active in New Haven. [Citizens is] most active in the apartment market. A lot of acquisitions, rehabs and repositionings. The level of delinquencies and defaults are at historic lows.
How is the office market?
New Haven has remained very strong, but we haven't done many big office transactions because they typically go into the insurance and capital market. In New Haven we have seen growth in the medical market. That sector in general is getting very expensive, but is [still] growing at a decent clip.
Are you concerned about how long the market will last?
There isn't a tremendous conversation about when the shoe is going to drop. I think we all learn from our banking mistakes and we haven't forgotten what happened in the past.
Could you rank the strength of the state's counties in the retail and office market?
I would probably say that Fairfield County is the strongest, with New Haven following at No. 2. Hartford seems to still be struggling and New London doesn't have the critical mass that other counties have.
How is the apartment market near the casinos?
That is one sector that has blossomed because of the casinos. The apartment market has improved dramatically. There has been a huge single-family subdivision and multiple subdivisions as a spin-off because of the casinos. I am not aware of any retail spin-off, though.
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