Rochester area lenders ‘cautiously optimistic’ about 2025 CRE funding

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As 2024 ticks to a close, cooling inflation, an increase in consumer spending and September’s first federal funds rate cut since 2020 are some of the positive indicators for the year ahead, according to lenders in Rochester’s commercial real estate space.

“For the last couple of years, the market has been processing and dealing with the Fed’s actions to dramatically increase rates in response to a dramatic increase in inflation,” said Martin Birmingham, president and CEO of Financial Institutions, Inc., and Five Star Bank. “So commercial real estate development definitely was impacted by those actions.”

Over the past several years, inflation relative to the cost of materials and labor has been a real issue, as has the cost of capital that developers and real estate investors have had to consider, said Birmingham, who notes that Five Star has been a willing lender in this space throughout, but has had to increase selectivity.

“I think the good news is that the Fed has signaled that they must be comfortable with all the issues they are managing relative to inflation and relative to trying to engineer a soft landing overall with the economy,” he said. “They decreased rates 50 basis points in the last several weeks and are anticipated to do more before the end of the year.”

Birmingham is cautiously optimistic banks will see increased CRE activity in the year ahead but notes some risks could ultimately impact this type of lending industry-wide, including geopolitical issues.

“While there are factors outside of our control and the control of our customers one thing that is in our control and that we’ve prioritized is ensuring that we are working with the right sponsors,” he said, noting Five Star remains also remains very vigilant relative to supporting its existing borrowers and to the administration of its portfolio to ensure that all products are performing.

At ESL Federal Credit Union two new relationship managers were recently added to the commercial real estate team — a tangible sign that the financial institution is looking towards 2025 with optimism.

“With inflation and interest rates continuing to stabilize, the developers are becoming more comfortable with acquiring real estate, starting new projects, or even resuming projects that they previously planned, but may have put on hold because of the higher costs and rates,” said Jon Fogle, manager of commercial real estate, ESL Federal Credit Union.

With interest rates and inflation stabilizing, developers are also able to model their projects better reflecting positive returns for them, Fogle said.

“Typically, developers will borrow between sixty to eighty percent of a project from an institution like ESL and if material costs, labor and borrowing costs are too high, the cash flow that’s going to be produced by the project will limit the borrowing capacity to less than those amounts, requiring the developers to inject more equity into the project,” he said.

The need to inject more equity then lowers the return on investment for the developer and makes it less attractive for them to do.

“As things stabilize and hopefully as costs come down and rates come down, it will actually help the developers get more of a return and we should see more activity out there,” Fogle said. “We’re feeling optimistic about 2025 given the state that we’re in right now.”

Tips Fogle has for developers and investors in the CRE space are to buy things at the right price, don’t overleverage your assets and stay in communication with your banker.

“Our community has a great amount of fantastic developers with great experience and the capital needed to start these projects or see these projects through,” he said. “We’re having some great success because of the developers here in the Rochester market in 2024 and our outlook is that we’re going to be busier from that side of things in 2025.”

Timothy Jones, EVP, chief lending officer, Genesee Regional Bank has worked in the banking industry for thirty-plus years and has never experienced anything like the last twelve to fourteen months from an interest rate perspective.

“We had to do a lot of blocking and tackling and we were talking to our customers very often about their deposit rates, certainly, and what that meant overall, in terms of the lending side as well,” Jones said.

In terms of inflation, he also saw an impact on everything that goes into a construction project from materials to labor costs.

“It seems to be settling back down a little bit,” Jones said. “We are an active commercial real estate lender. We are engaged currently in some construction projects, and we’ll continue to do that, but we are very cognizant in talking to borrowers about making sure their construction budgets are ticked and tied.”

Due to Rochester’s challenges with housing supply, Jones is seeing and expects to see increased demand for lending for multifamily housing projects.

“We’re certainly cautiously optimistic that Rochester will continue to be somewhat resilient relative to the rest of the country in terms of employment and inflation and all those things,” Jones said. “And as a community bank, we want to be able to support any type of project that needs to be financed in some form.”

Caurie Putnam is a Rochester-area freelance writer.