How Credit Unions Are Boosting CRE’s Capital Supply: Q&A

Charles Krawitz, Vice President, Commercial Lending and Loan Trading, Alliant Credit Union. Image courtesy of Alliant Credit Union

Credit unions play an essential role in the commercial lending space by complementing what traditional banks and life companies provide. While last year brought on a fair share of challenges and uncertainty, capital providers such as Alliant Credit Union remained consistently in the market.

Charles Krawitz, vice president of commercial lending and loan trading with Alliant, shared with CPE key lessons learned from 2020, as well as the reasons behind a 10-year high in deal flow for Alliant.

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What strategies have credit unions applied in commercial mortgage lending since the health crisis-generated economic uncertainty?

Krawitz: The pandemic and resulting economic uncertainty pushed a lot of traditional commercial mortgage lenders to the sidelines in 2020, with many exclusively lending only to their very best relationships. But many credit unions, as well as debt funds and community banks, were able to step in to fill that gap. At Alliant Credit Union, we never stopped lending and we’ve remained consistently in the market, lending to experienced borrowers with asset type and geographic proficiencies.

One key lesson learned from 2020 is that it doesn’t pay for borrowers to put every last dollar to work. It’s more critical than ever to have cash available to sustain operations through a crisis. So, we’re looking for more reserves than in the past to ensure borrowers are prepared to weather future storms. And in the current environment, we’re looking to do more floating-rate bridge lending as borrowers seek to reposition properties to prosper in the face of significantly changed preferences.

What makes a credit union a viable lending source compared to traditional banks and life companies, for example?

Krawitz: Credit unions are an important supplementary capital source in the commercial lending space. In the event that a borrower can’t turn to their primary bank for a commercial mortgage, whether for reasons of geography, lending standards or other factors, a credit union can step in and make the loan in a way that is mutually beneficial for the borrower and for our membership base. We provide an additional capital resource to the marketplace, complementing what traditional banks and life companies offer.

What is your take on a potential wave of distressed properties hitting the market? 

Krawitz: I’m hopeful that with the distribution of stimulus funds and COVID-19 vaccines, the overall economy is moving in a positive direction, and as a result, there won’t be a huge wave of distressed properties hitting the marketplace. In the event that we do see some of that activity, it’s important for borrowers and lenders to collaborate on finding solutions.

Keeping the lines of communication open, listening to the other party’s point of view and bringing ideas to the table to modify the loan or adapt the property to current market conditions can help borrowers and lenders avoid the undesired outcome of a foreclosure.

Alliant Credit Union saw a 10-year high in deal flow in the first quarter of the year. What were the main factors behind this surge?

Krawitz: Last year, we remained steadfast in our approach to lending while a lot of capital went to the sidelines. Commercial mortgage bankers recognized us as a source of capital that could fill the gaps where other lenders had less appetite, and as we did more deals, we deepened our relationships with larger mortgage brokers, which resulted in more opportunities.

On top of that, many investors are coming back into the market after sitting on the sidelines in 2020 and are looking to take advantage of low rates before they rise. We’ve been well-positioned to capitalize on that uptick in overall deal volume.

Tell us a bit about Alliant’s step-down prepayment structure.

Krawitz: As a credit union licensed in the state of Illinois, we charge a yield maintenance fee with a step-down structure. We’ve found the simplicity of that structure to be appealing to borrowers.

In your opinion, what are some of the biggest challenges and opportunities facing the capital markets arena in 2021?

Krawitz: Between the stimulus payments, widespread distribution of COVID-19 vaccines and the current administration’s ambitious infrastructure plan, we see an economic recovery on the horizon and an influx of capital coming into the markets in 2021. This may lead to a degree of inflation and upward pressure on interest rates. There is certainly pent-up demand among newly vaccinated consumers to get out and spend, but whether the gains of a spending surge will translate into sustainable long-term prosperity remains to be seen.

While some sectors of the economy will bounce back quickly, others may be forever altered. For instance, most organizations place too much value on the collaborative nature of in-person work to give up their offices entirely, but they certainly will adapt to new flexible working styles. The impact of these new usage patterns on the office market will take some time to play out.

When it comes to brick-and-mortar retail, not all tenants will return, so there is the question of how to meaningfully repurpose those buildings. Leisure travel will rebound as people get vaccinated, but thanks to the proliferation of virtual meetings throughout the pandemic, business travel may not return to pre-pandemic levels, which could have a marginal effect on the hospitality industry.

What do you anticipate for commercial loan volumes in 2021?

Krawitz: We anticipate that loan volumes will be higher across the marketplace in 2021, with more transactional activity occurring. After an exceptionally challenging year, many retail, office and hospitality owners are ready to sell—and there are buyers in the market. Investors looking to diversify beyond equities may turn to commercial real estate while interest rates remain too low to make the bond market attractive.

At Alliant, we’re projecting 2021 will be our best year yet when it comes to commercial real estate lending, with a 50 percent increase over last year’s loan volume. We’re confident in the future of the workforce and the demand for housing, and we believe there will ample opportunity for skilled project sponsors to successfully reposition properties.