Local bankers and commercial real estate players say there’s clearly been a slowdown in commercial real estate lending in recent months, as higher interest rates and more cautious banks have discouraged developers and investors from proceeding with many new projects across the state. 

But bankers, developers and CRE brokers say there’s still activity on the lending front in New Hampshire – especially for industrial and multifamily properties – as long as developers and investors can afford higher costs associated with rising interest rates and more expensive construction materials. 

“The lending market has slowed down a bit,” said Ron Magoon, chief executive of Franklin Savings Bank in New Hampshire. “Everyone is being more cautious in terms of lending. It’s a normal thing at this point in a [business] cycle. I know we’re more cautious.” 

Besides higher interest rates and escalating construction costs, the fear of a possible recession is also causing unease and hesitancy within the entire development sector in New Hampshire, Magoon said. 

Chris Logan, CEO of the Bank of New Hampshire, agreed that the CRE lending market has “definitely softened” of late.  

But Logan, whose bank has about $1.4 billion in commercial loans on its books, said his bank hasn’t gotten more cautious with its lending standards. This puts it in a distinct minority among American banks according to the most recent Federal Reserve survey of senior loan officers that showed around 4 in 5 U.S. banks had tightened their commercial real estate lending standards to some degree.  

The real problem is simply higher interest rates and inflation in general driving up the costs for new developments, major renovations and acquisitions, Logan said. 

“We haven’t tightened or loosened our standards,” he said. “But costs have risen and real estate is simply not as profitable.” 

 

(sub)Offices Hard to Finance 

The overall lending slowdown isn’t the same for every CRE sector. 

Financing for office properties, which have been hit hard by the rise of remote working, is more difficult to obtain.  

On the surface, the office sector in New Hampshire is holding steady, with a vacancy rate of 10.7 percent across the state in the first quarter, the same level for the same period in 2022, according to data from Colliers.  

Meanwhile, office rents were also up 3.5 percent year-over-year in the first quarter, according to Colliers data.  

But the net office absorption rate across the state was down by about 160,000 square feet year-to-date in the first quarter, compared to the same period in 2022. 

That and other warning bells about the future of office properties have prompted Brady Sullivan to propose conversions of office space into apartments at the old Cigna building in Hooksett and at 1230 Elm St. in Manchester. 

Brady Sullivan executives couldn’t be reached for comment on how the firm plans to finance the two conversion projects. 

But CRE brokers say the conversions of office properties to multifamily housing is indicative of where the lending market is headed. 

“The office sector has taken it on the chin,” said Thomas Farrelly, executive director at Cushman & Wakefield of New Hampshire. “For office REITs and other investors, there’s more concerns about office properties.” 

Farrelly and others stress: There haven’t been any major defaults on office loans in New Hampshire, and some question if there ever will be. 

But office properties are clearly seen as riskier investments – and riskier loan prospects — these days, industry observers say. 

Industrial Retains Appeal 

One popular investment and lending sector remains industrial properties, particularly warehouses serving booming e-commerce firms that need strategically located fulfillment centers for business and home deliveries.  

In the first quarter of 2023, the vacancy rate for New Hampshire industrial properties was 2.9 percent, down from 3.3 percent in the same period in 2022, according to Colliers. Rental asking prices, meanwhile, were up 33 percent in the first quarter compared to 2022. 

According to Colliers, the 94,000-square-foot warehouse/distribution building at 16 Swamscott St. in Newfields sold for $5.15 million, or $55 per square foot, to a Massachusetts-based investor in the first quarter.  

The 44,000-square-foot warehouse/distribution facility at 340 Commerce Way in Pembroke was purchased by a local investor, Ben Kelley, for $2.9 million or $66 per square foot in January, Colliers reports.  

Meanwhile, the 60,000-square-foot flex building at 1 Hampshire Drive in Milford changed hands in January, selling for $2.9 million – $49 per square foot – to a New York-based investor. 

“Industrial is still No. 1,” said David Eaton, managing director of Colliers in New Hampshire. “Industrial properties remain strong. I don’t see that changing.” 

)CUs Show More Interest 

As for CRE lending in general, Eaton said credit unions appear to have a “larger appetite” for lending than commercial banks. 

He said a recently floated CRE deal attracted strong competitive bids from credit unions – and four “less competitive” bids from commercial banks. 

Eaton said he doesn’t quite know why banks seem to be more cautious than credit unions, but it might be due to recent bank failures and increased regulatory scrutiny of banks compared to CUs. 

As for the potential for CRE defaults in New Hampshire, Eaton said there’s always the potential for major defaults, but he said he’s not sure it’s a big concern.  

The reason: The state’s CRE market never got overheated in recent years, thus minimizing the chances of major defaults on outsized loan resets, he said. 

Bank of New Hampshire’s Chris Logan agreed that loan defaults appear to be more of a concern in major metropolitan markets than in New Hampshire. He noted that his bank, so far this cycle, has experienced no major CRE loan delinquencies. 

“Delinquencies are still at historically low levels,” he said of CRE loans in general across New Hampshire. 

Tuscan Village Developers ‘Comfortable’ 

Glenn Verrette, executive managing director of Tuscan Brands Real Estate, sees no problem in securing financing for his firm’s ongoing redevelopment of the old Rockingham Park racetrack site in Salem.  

The firm has already developed and opened 1.4 million square feet of mixed-use space at Tuscan Village, with plans to develop and open an additional 2.6 million square feet in coming years.  

Boston-based Berkshire Bank has been the lead lender of the Tuscan project to date, with other New Hampshire and Massachusetts banks also involved in financing as well, Verrette said. 

“Any real estate company, including ours, is sensitive to the lending environment,” he said.  

“The higher interest rates have increased our costs. But we’re comfortable moving forward.  We go through a very rigorous financial review process before proceeding [with construction]. We have parcels ready for development.” 

Sal Lupoli, owner and CEO of The Lupoli Cos., said he’s currently eyeing possible mixed-use developments in the Manchester and Concord regions – and doesn’t see any problems lining up financing for the largely multifamily projects. 

“Lenders and investors feel very safe with multifamily development,” he said, noting the acute housing shortage in the Granite State and the strong demand for housing. “We’re very focused on work-place housing. In New Hampshire, we’re making a lot of development plans.”