Banking in 2022 | The Stoler Report-New York's Business Report

Banking in 2022 | The Stoler Report-New York's Business Report

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♪ [Theme Music] ♪ ♪ [Theme Music] ♪ >>> Michael: Ooh, my apple over here. I just shined it up. I was wondering how 2022 is going to look, especially for the world of banking. I don't know the answers. So, today I have assembled this group of three distinguished bankers to provide their insight in banking 2022. My guests include

Dan Harris, who's the president of the New York City region at OceanFirst Bank. Peter Meyer, who is the managing director, real estate financing, the New York Community Bank. And last but not least, Frank Korzekwinski, who is the senior executive vice president in charge of real estate financing in Flushing Bank. All three of you have seen things over the years, but I don't think we've seen as many merges taking place in 2021 as we've had. What do you see in the future?

Will this continue, you know, this depository of mergers? Dan, what's your thoughts? >>> Daniel: Yeah. I think everything looks like it's going to continue fairly aggressively. It's, it's the landscape for banks is challenging right now with rates the way they are, both on the borrowing side -- the deposit side is very good, but it's hard to earn on the borrowing -- on the lending side. So, I think mergers will

continue. Opportunities will exist. OceanFirst just announced a few months ago, we're buying a small bank in Virginia. So, we continue to look for opportunities when they arise. >>> Michael: Pete, hopefully by the end of January, you know, the Flagstaff and New York Community Bank deal will take place. What effect is that going to have on the bank financing of different transactions? How did, how does the bank project that? >>> Peter: Well, the, the merger will allow us to expand our footprint. Flagstar Bank of Michigan is a -- deposits that we are actually looking for based on the, like Dan said, the interest rate environment. So, we can borrow more money

from ourselves, we can, that we can use that money to expand nationwide. That's the plan with the Flagstar merger. >>> Michael: Frank, you're staying regionally right now. It looks like that. >>> Frank: Yeah, well, we've recently completed the Empire merger, which went very well. We've had a lot of success with that operation. The geo jumping doesn't seem to be in the cards for Flushing at the moment. I, I think quite honestly, with

all of the activity going on in the market, a lot of waiting on the sidelines to find out what's going to happen for the regulators, which we believe all the mergers will be approved. I think that puts us in a very good opportunity to continue to grow organically. Obviously, the New York metropolitan area will, will, may remain our primary focus in terms of banking and lending. We're pretty excited about having gotten close enough to that pen, $10 billion mark -- benchmark number, gives us a lot of prowess in the marketplace and certainly some more brand recognition. >>> Michael: Dan, the other day, you and I were talking about the changes that you're seeing with LIBOR and other things. Let's talk about some of your thoughts for 2022.

>>> Daniel: Sure. Banks are no longer allowed to price LIBOR deals starting next week. Starting in January, you have to use as an alternative floating rate for those types of deals. So, some banks are moving to SOFR, some of them

are moving to prime minus scenario to roughly equate to LIBOR math. So that's changing -- that's, you know, it's changing our thoughts about it. But at the end of the day, it's where they end up with a similar short-term floating rate, if it's a floating rate deal, a transitional deal or the fundamentals under swap transaction. So, you know,

pricing is very, very competitive. As we spoke, there are, there's a tremendous amount of competition, not just among the banks, but there's a lot of debt funds that have grown. I think one just raised $4 billion the other day, Brookfield. And just so we have CMBS of course, and Fannie and Freddie agencies. I mean, there's tremendous competition

out there. And so, we're all competing against each other. But the move from LIBOR where it really shouldn't affect too much, except the index that we use for short-term debt pricing. >>> Michael: You know, with regard to the Fannie and Freddie, Frank and Peter, how do you see that affecting your business? Because the pricing is exceptionally competitive.

>>> Frank: Well, we've been focusing in a smaller market, in terms of the multi-family financing. There's a lot of press lately about -- Freddy, specifically getting aggressive in the smaller, up to, I guess, 50-unit apartment building arena. That's certainly going to put a little bit of pressure on us. They've certainly, are able to do loans, under certain credit criteria that banks are not permitted, specifically with debt coverage ratios, and other covenant restrictions that banks have that Freddie and Fannie generally do not have. We haven't seen it a total disruption in the market

at this point. Mainly because of the banks, local banks' willingness to work more closely with their, their borrowers. When you get into a Fannie and Freddie deal, it's a one way deal basically. You accept the terms of the transaction as presented by Fannie or Freddie. And if you don't, you don't have the deal. So, you know, our ability to

work more closely with customers to try and meet their needs, gives us a little bit more of a competitive advantage. But let's face it. You know, the pricing that they can achieve through having the implied guarantee of the federal government, in many cases, people believe direct guarantee, certainly puts them at a, a strong advantage point from the pricing. >>> Michael: Pete? >>> Peter: Yeah, similar. We compete in larger deals with Fannie and Freddie. If a stable borrowers who will borrow from them and then they'll borrow from us. One of the advantages we have, I think, feel is our loan docs, a little more friendly towards the borrower, but we're still protected. And

the certainty of execution. You know, someone comes to us, goes to us and Fanny, you know, we send a quote out there, you know, 99% of the time, we will honor that quote. So, I think in a lot of the borrowers, when they are time constrained, they need to close quickly. They'd much rather go to us, maybe pay a couple of basis points extra, maybe a year or two less than I owe, but we could always execute that transaction. So, it is tough. It's very tough. It's very competitive. But I

think for now we're holding our own. We'll see what the future holds. >>> Michael: Some of the banks have been talking about heavy FinTech and they're talking about, ya know, you know, Bitcoin. Any discussions or any thoughts with regards to banking and Bitcoin and the other coin based secure-- denominations for 2022, both in the lending position and the investing position? Dan? >>> Daniel: No, and not at our shop. We really haven't. I

think what the three of us bring to the tables, commercial real estate folks and I know there's a lot of FinTech is trying to get into commercial real estate as well. You know, we've all been doing it a long time. I think what Frank said is exactly right. Borrowers rather deal with us, because

there's a voice on the other end of the line. We're flexible. We understand the industry and if there's something comes up, we can work around it. That's not always true with the alternative financing vehicles there are and our pricing is still very competitive. So FinTech is trying hard to get into the seat commercial real estate space. As we all know, every deal is unique. And I think

that's really hard for them to do competitively with us, unless the deal is absolutely perfect, which few of them are. >>> Michael: And I know each one of you has limited exposure in the, in the hospitality. But certain transactions still makes sense. Some of the hotels, limited service, and

making more money today than they made before, because their labor is reduced. They change their procedures. How do you look at when a good borrower or a new borrower comes to you, when they bring up the word hospitality or hotels? >>> Daniel: OceanFirst Bank has a tremendous amount of lending along the Jersey shore. Hospitality along the shore, and the destination locations has done extraordinarily well during COVID. We're quite bullish on that segment. That being said, there's other segments. Some of the urban segments certainly are back to where they need to be. And this latest COVID surge certainly hasn't helped. But you know,

it's winners and losers. The big prices are still being paid and hotels are starting to trade again in the destination and tourism locations. Whereas the business hotels that are based on business customers not doing quite as well yet until the business travel resumes and conferences resume. >>> Michael: Frank or Pete, any thoughts? >>> Peter: Yeah, we've done, you know, again, when we do hospitality, we don't do a lot of it. But we'll follow a

borrower, we'll look at their business plan, line it up to what our goals are in that market. It happens to be a, you know, another part of the country. But some of those items we, some transactions we'd be looking at is probably more in a suburban market. With the hotels, with people traveling not flying, those hotels appear to be doing very well. Like you said, their labors in -- labor expense has been reduced, because they're not cleaning rooms every day, less people on staff, you know, they're afraid of the COVID or they'll want to retract it with the client on -- you know, people staying at the hotels. So, we're picking and choosing,

but we think what we've done so far has been very solid. >>> Michael: Frank? >>> Frank: I would agree with both. The travel industry, if you're, if you're doing the stay vacation kind of thing has, has really done wonders here in the northeast, Jersey Shore, eastern end of Long Island, the cost of New England. It seems to be, there is remains concerns for any type of long-term travel, whether it's an airplane or overseas, obviously, with the latest variant Omicron, who knows what's going to happen with travel. Office seem to be

moving along nicely, not enough to really lift the inner city hotel occupancy rates, but again, with the new reactions to what's going on with Omicron, I think that it's going to be a tough slug. I'm really happy to see some of these larger flagship hotels trading, you know, I guess we'll see some new life into some of these larger hotels reinventing themselves. We're not looking to, to grow that particular portfolio, but as I indicated earlier, supporting our local communities, whether it be on the eastern end of Long Island through the empire transaction, or even the facilities that, that are lining the outer boroughs, they've seem to do very well. You still see families willing

to travel to visit families for weddings and holidays and things like that. So our, our focus will really be mainly on supporting the, the clients we have and not necessarily growing that particular sector of the portfolio. >>> Michael: So, here's a question. I know the three of you are all back to work. You're all in your offices and a good number of the employees are there. What happens to the,

C and D buildings when people aren't returning to the office? Coupled with the safety question right now, how do you look at the office market and would you entertain office loans on office buildings? Pete? >>> Peter: Yeah, we are monitoring that closely. When COVID first hit, we offered deferrals of payments for a while and we'll ask it for about six months. They came back online. We've been monitoring that very closely. We do have some C and D buildings, but we also do have some A and B buildings. We've been in conversations with our borrowers. So far, they seem to be okay. There's been some rent concessions in the smaller buildings and more so in the Garment Center area. But we're pretty confident we'll --

you know, going forward, they'll bounce back. We are entertaining We have done some new loans for office buildings over the last, you know, a year. We're comfortable. But again, in is all three of us always know, it's, you know, you got to pick your sponsor. You really do. And that's what drives the transaction for us.

>>> Michael: All of you do business also in Long Island and New Jersey. Different office market type of composure and everything over there. How do you look at the office market business in Long Island and in New Jersey? Frank? >>> Frank: So, we don't really have much going on in, in New Jersey. A lot of it is smaller, I guess you would call it C and D grade buildings. You know, 20,000 or less square

feet. They've seem to have held up fairly well, at least as have been long term. We're starting to see some velocity in, in the rental, in the suburbs. Long Island is a bit unusual, because there are some rather substantial companies in Manhattan that have employees commuting from Long Island. So,

we've seen an uptick in leasing spaces, relatively short term notice, to support some of the office needs of larger organizations. You know, if the typical Long Island rental stream really hasn't grown much over the past 15 to 20 years, supply has been relatively stable to stagnant. You know, again, what we're seeing leasing is, is those types of facilities that are probably more century located, to major intersections of the LAE or the, the Southern State Parkway. A big push in the medical world out there. A lot of these doc in a box set ups where you have the City MDs and things like that are, are taking over space. You know, we're, we're cautious of what we will do in the office building market. You know, we generally like to see a rather diverse tenant roster, both industry-wise and as well as the number of tenants in a building, not looking to be concentrated in any one solid tenant. But surprisingly, the

office market for Flushing throughout the pandemic performed very, very well, largely due to the fact that most of the leases are long term. >>> Michael: There's going to be a new retailer in town in 2022. It's called the cannabis retailer. They're going to be cannabis stores. They're going to be cannabis lounges. As a bank, what's your position, or any thoughts about lending to a, an owner who is leasing out a space to a cannabis business or a dispensary? Dan? >>> Daniel: [laughs] I was afraid you'd ask. I mean, the laws are little bit unsettled on federal level. So, it's

challenging for us. There are guidelines that we go by. If it's an insignificant piece of the cashflow, we're okay with that, that legal tenancy being focused on that business. So, you know, we look at it a case by case basis. But I think once the cashflow from that tenant gets up over a certain percent, maybe over 25%, we're going to be more hesitant until there's more clarity in the law with respect to that industry from the federal level. The state seems to be a non-issue right now, but at the federal level, we still haven't gotten clarity with that. So, you know, we're not, it's not forbidden, but it's not, we're not going to do a single tenant building leverage that's focused on that industry at this point.

>>> Michael: Pete, Frank? >>> Peter: Yeah, we're, you know, we get a lot of requests to put on some cannabis stores in various properties that we already have loans on. Again, depending on the borrower, like Dan said, and depending on the revenue that's going to be contributing to that loan. One big thing is most of these stores require an SNDA. At this point, we're not overly comfortable signing them. We'll take the tenant can move in, but you know, we'd rather not have that SNDA on the books right now, and it gives us some leeway to do something and, you know, take care of some business if something should go wrong or go south on a particular building, whether it's cannabis related or not. >>> Michael: Frank? >>> Frank: So, it's an interesting concept, you know, with contradictory, federal opinion versus what's going on in the tri-state area. We haven't seen much demand for

that type of facility nor have we seen inclusionary tenants with that particular background. I think that one thing that we're very careful is a reputation risk. If you follow what's going on here in New York, I think I saw something this morning then could be as much as 70% of the towns in the state are opting out of these dispensaries. So,

you know, given the fact that many of the towns that have opted out are towns that, you know, we have a footprint and a presence in, we're very sensitive to our reputation in the marketplace. So, we don't have any formal policy at this point. But we're watching it very closely. We've we do believe that whatever actually take, you know, could end up being somewhat of a reputational risk for us. >>> Michael: So, here's the, here's the point. It was -- 2000, June, 2019. They changed the rules on rank-- rent-stabilized apartments. We have a new mayor. We have a new

comptroller in the city of New York, and we have a new governor. Plus you have the same administration in Albany in different ways who are very pro-tenant. How are you looking at lending on multi-family which has been the leading asset for New York Community Bank and a major asset for Flushing? Frank? >>> Frank: So, rent stabilized apartments really continues to be the core of our multi-family portfolio. Obviously, the last couple of years have been a real challenge for property owners with the rather tight permitted increases that they'd been offered through rent stabilization. And they're also

fighting some challenges within the rent regulations with regards to rent increases as a result of capital improvements. But at the end of the day, you know, this is a housing stock that's covered well over a million apartments in New York City. It's not going to go away. We do believe that increases will be calming and improving over time. There is some concern about the tax aspect of it. Substantial developments in metropolitan and particularly New York City area had been granted rather substantial tax abatements and exemptions that, you know, go out 30 -- as long as 30 years.

That's going to put a tremendous amount of pressure on a smaller operator. So, we are just really trying to pay attention to the fixed expense side of the balance sheet or the operating statement of these borrowers, to make sure we leave enough room for any potential increases going forward. And with respect to the free market arena, there's a tremendous amount of development going on throughout the tri-state area. And it appears as though the absorption remains very strong. So, we're also excited about

getting involved in areas outside of the five boroughs of New York City. >>> Michael: Dan? >>> Daniel: I mean, clearly multi-families are on fire throughout the country. That's one of the strongest segments probably next to industrial. Although multi-family doesn't seem to be as COVID focused. You know, we do a good amount of multi-family, particularly outside of New York. We do a decent amount in New York, most of its market or maturity market rents in New York. And as we know, the housing

shortage in New York is significant. The rents for the non-regulated units has absolutely gone through the roof. Although it was a year ago, was a whole different world. It's changed on a dime and now apartment market in New York are extraordinarily expensive for relatively small square footage. So, I think it is a matter of time before the

dichotomy between the market rents and regulated rents and how those buildings develop over time. It's gone to dawn on the people in Albany. And now though, they'll retreat a little bit with what they did back in 19, but I think we have a little ways to go before that happens. >>> Michael: You know, I recently did a show on retail and, and there are a lot of new tenants coming into town.

People are making deals. They were percentage rents, they're changing the opportunities and the offers over there. How do you look at retail in general? I mean, and the repositioning of retail -- I think that's a big item discussion, the re-- the reposition of retail and the reposition of office buildings and we spoke about into residential. Any thoughts

about that, Frank, or Peter? >>> Peter: You know, we gotta be a little careful in retail. There is a lot of vacant stores, you know, in Manhattan, you know, in some really high rent districts. So maybe we'll be taking a pause on financing of some of those properties. Some of, you know, retail in the city, you know, tons of traffic, even in the COVID era. Those stores should remain to do well. I think their price per square foot is held out

pretty decently so far. So, you know, we just based on where the area is and what that price per square foot, we're seeing a lot of appraisals being adjusted downward rents. Although appraisal will come in with a downward rent. However, the tenant had just signed a new five-year lease, that's above those market rents. So certain tenants want to be at certain locations, you know, 14th street is a great example, is still, there's only minor vacancies there. Some of those

large tenants are staying and renewing leases. Landlords are just trying to capitalize and getting long-term leases and tenants trying to get long-term leases in with maybe lesser per square foot number. >>> Michael: Frank, Pete -- Frank or Dan? >>> Frank: Yeah, I think, I, I agree with Pete. You know, one of the things that Pete brought up was location, location, location. We, we have a very strong retail portfolio. It's primarily what we call central business district. Pretty much the ground zero area, the inner boroughs of New York City. You know, we've always felt that given the size or the

relatively small size of the living accommodations of these apartment buildings in the five boroughs, people are more inclined to go out and do things. They interact more so than they would be out in the suburbs. We have not seen a declining rental market in our portfolio. As Pete indicated earlier, you are seeing some, some vacancies, you know, the large box spaces are, are, are really difficult to rent. Some

owners are reinventing themselves, splitting up those spaces into more functional, you know, 2,500, 3,000, 5,000 square foot type spaces. You're seeing a good number of units going to medical in some way, shape or form. And we're also seeing some of that excess space being absorbed in some sort of some form of professional space or community space, maybe an attorney, or real estate offers, or something like that. You know, in, within the five boroughs of New York City, we have a tremendous amount of density and that density continues to support the occupancy as well as the rents. A little bit different on Long Island. On Long Island, we focused more on commercial properties or, or retail properties that were less sensitive to online shopping. And they generally were strip malls or local shopping centers that were focused on conveniences and food. And again, that that's done very well for us.

>>> Michael: So, in summation, I hope that my apple, which I've been shining all, all day, keeps bright and that the world continues to look better. We've had many variants. We've had, COVID. Hopefully, you know, vaccines and other things will change our lives. But I'm certain that one thing is going to take place, that all three of you are going to be continuing to be active in lending to the community. I'd like to thank Dan, Peter and Frank, and I'll see you next week.

>>> Frank: Thank you. >>> Peter: Thank you, Mike. ♪ [Theme Music] ♪

2022-01-25 11:23

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