Commercial Lenders Field Strong Demand

YOUNGSTOWN, Ohio – Despite the obvious headwinds – high fuel prices, supply issues, a tight labor market and uncertainties in the global economy – demand for commercial loans remains strong among local community lenders.

Indeed, while commercial lending in the retail sector is still soft, loan activity is healthy in the manufacturing, multifamily residential, oil and gas, and warehousing and distribution markets, according to commercial lenders in the region.

“The lending environment is still strong, based on what we’re seeing in the market,” says Scott Dodds, executive vice president, senior lender at Consumers National Bank, a community bank with branches in Columbiana County. “It’s doing fairly well, considering supply issues, inflation and the world market.”

That’s the consensus of lending officers and executives who represent Consumers National, Middlefield Bank and 717 Credit Union.  Most customers, they say, have placed the pandemic in the rear view mirror and are prepared to move forward with new investments, even though challenges remain in sectors of the local economy.

“Our businesses in this area are pretty resilient,” Dodds says. “We’re seeing investments in most of the industries we’re dealing with.” Much of this is related to equipment financing, he says, noting that most manufacturing customers are doing well. 

Among the biggest challenges facing small businesses in the area is the tight labor market, Dodds says. “What we’re hearing is that they could expand more if they could hire people. And that’s across the board,” he says. “Demand is there.” 

Nevertheless, small businesses have major questions about where the economy is headed, because the fallout from economic sanctions on Russia and the war in Ukraine have led to skyrocketing fuel prices.

“We’re having conversations with our clients and right now, they’re trying to figure out the rules of the marketplace. I think there are new issues to deal with here,” Dodds says.

Still, commercial lending activity continues to push forward, Dodds says. “We’ve experienced good, long growth over the last couple of years and we expect it this year,” he says.

Among the sectors showing the strongest growth in lending activity recently is commercial real estate – specifically demand for multi-unit residential complexes, says Brett Carnahan, vice president, commercial lending manager at 717 Credit Union in Warren.

“There’s some migration from Wall Street to fixed assets such as real estate,” he says. “That’s driving some of the volume and demand.”

Higher prices and low inventory in the residential housing market has also driven up rental rates across the country, Carnahan says. 

This has led to an in increase among those looking to acquire or make major renovations to existing apartment complexes in the local market, he says.

“It’s not slowing down,” says Daniel Harp, 717’s senior vice president and chief lending officer. “If housing prices are high, you’ll need to rent. A lot of people think real estate is a lot safer bet than Wall Street.”

This activity is in line with the most recent forecast from the Mortgage Bankers Association, which projects commercial lending for multifamily projects across the country to reach $493 billion in 2022.  This year’s projections represent a new record and a 5% increase over 2021, the organization says. 

In all, the Mortgage Bankers Association reports that total commercial lending this year is expected to surpass $1 trillion for the first time, a 13% increase over an estimated $900 billion in 2021.

Challenges brought on by the lingering pandemic certainly affected their bottom line. But some of those affected the most have seen a rebound, Carnahan says.

“The hotel industry was one industry that was hit hard,” he says. “But, their reservations are up and the outlook is more positive.”

This trend is likely to slow should rising fuel prices hamper travel, which would also affect the hospitality industry, Carnahan says. 

Other businesses are turning their capital toward more technology in the workplace, as average wages have increased and labor is in short supply, says 717’s Harp. “Wages have increased. So businesses are investing in new technology to streamline and make them more efficient,” he says. 

Harp’s team is working on a loan for one customer in the warehousing and storage business targeted at improving its information technology capabilities. “It’s all across the country,” he says of that example.

Larger businesses with deeper pockets and more capital resources are better prepared for potential downturns and other outlying financial pressures, Carnahan says. Small businesses, on the other hand, often need the help of their lenders to weather such storms.

“That’s where small businesses and their relationship with their financial institution will make the difference,” he says.

Nevertheless, the constricted labor market is limiting opportunities for business expansions, says Greg Yurco, senior vice president, senior commercial lender at Middlefield Bank, which has a branch in Cortland.

“What we’re seeing is that businesses have the opportunity for growth. But they’re not able to acquire the necessary labor to take advantage of that,” he says.

In some cases, customers have turned to securing loans for new automation to alleviate the tight labor pool, Yurco says. “One shop couldn’t acquire enough welders. So they brought in a couple of welding robots to fulfill their contracts,” he says.

In this market, many light manufacturing customers are investing in more automation because they have no other choice, given the difficulty to find qualified workers, says Michael Allen, Middlefield executive vice president and chief banking officer.

“They’re looking at what type of automation to invest in so they don’t have to struggle to fill positions,” he says. “It’s not something they want to do but something they’re doing out of necessity.”

But these factors haven’t deterred those businesses that want to grow. “We have a couple of companies expanding existing operations in manufacturing,” Yurco says. “They’ve investing in new equipment.”

One customer in the oil and gas industry, for example, has opted to invest in a new environmental recycling operation. Other smaller projects include a car wash and a customer that is repurposing a former big-box store into a storage operation.

The lending market for commercial retail projects, however, is challenging at the moment, Allen says.  Construction costs remain high, while bricks-and-mortar retail has taken a hit because of the migration to online shopping. “We haven’t seen new opportunities for retail,” he says.

Middlefield, which has five locations in central Ohio, lends to customers throughout the state, Yurco says. Most of its local business is done with customers in Trumbull County.

Commercial lending in central Ohio is starting to move and likely to jump in the wake of Intel’s announcement in January that it would invest $20 billion over the next five years to construct two microchip-manufacturing plants in Licking County. 

In northeastern Ohio, among the hottest commercial lending markets is the Cleveland-Beachwood area, Yurco says.

“There’s a lot of demand in the market,” Yurco says. “We’re seeing a lot of strength in real estate. We’ve been successful with industry and have seen some recovery in the hospitality portfolio as well.”