FEATURE ARTICLE, JUNE 2009

Q&A On Topic:
Joe Hoesley, vice chairman of US Bank’s commercial real estate group, answers our questions about the industrial sector.

Hoesley

HREB: Can you outline US Bank and its commercial lending division?

Joe Hoesley: We have 25 offices around the country, four in the Midwest: Milwaukee, Madison, Chicago and Minneapolis. We are headquartered in Minneapolis, and our book runs about $148.5 billion in outstanding debt and about $25 billion in commitments for commercial real estate.

HREB: With the slow pace of lending activity, what are you looking at when it comes to lending to commercial users? What does it take for you to commit to a sponsor?

JH: We have always run our business on a relationship basis. We really don’t seek deals out as much as we seek clients and prospects, in order to build a relationship with them. The sponsor relationship is very important.

US Bank is looking at several categories, including refinancing for clients that are coming off of CMBS or life insurance company deals. Often, those borrowers need some time to either re-lease the property and/or complete some renovations. They can convert to a shorter, 2- to 3-year term deal.

The bank is still very actively engaged in construction lending, but the real catch there is that there has to be a reason for a project to be constructed today. If it is an office building, it has to almost be a build-to-suit. Industrial projects used to be heavily pre-leased, and then we saw a lot of spec projects go forward; now we are going back to where a project has to have tenants committed. For retail, a project has to be very defined, with a good tenant roster of signed leases. We are doing a fair amount of construction lending here in the Midwest and throughout the country, but it all has to make sense and there has to be a reason for it. We will not undertake any spec projects, whatever they may be.

HREB: How has your company philosophy helped US Bank weather the biggest challenges posed by the recession?

JH: The best way to answer that is to look at the stats here at US Bank for the commercial real estate department. The division didn’t grow enormously over the last 5 or 6 years in real estate. It was a real paced growth, very judiciously thought out, with no wide swings in loan growth year-over-year. What that has given us the opportunity to do is to build our business on relationships, and it gives us the opportunity now to use those relationships that we have to help our clients if they need financial backing for any real estate project in this market.

HREB: It is a strange marketplace currently, in that interest rates are so low and yet activity is also at such a low level. It is an unexpected juxtaposition from a typical low interest rate market, which often drives construction and investment activity — what do you think is causing that?

JH: Interest rates are not indigenous to what is going on in commercial real estate. The issue is with what is going on in the capital markets. I don’t know if low rates motivate people to develop. What should be motivating people to develop are projects that make economic sense. What is going to get the business going is getting through the process of lower prices, foreclosures, short sales, etc. Work needs to be done to shore up the condominium market and attract buyers to the condos.

If you take everything in context, heightened vacancies, lower rents, concessions, lack of home sales, lack of new starts — if you throw that all together you see that it is more of an economic issue than an interest rate issue.

HREB: What are your thoughts on US Bank going forward in 2009?

JH: I don’t believe at this point that the market is stabilizing. There is still a level of uncertainty out there with respect to commercial real estate and there is more work to do to get to where we can call the market stable. Once we hit bottom, we never springboard up off of that point immediately. We kind of go along the bottom and start to gain momentum and then we accelerate out of the trough.

I would say that we are going to stay very engaged with our clients. We are going to continue to make loans, and continue to lend to our client base and support them, because we understand that we are in business for the long term. We may have to adjust some of our parameters in the short term, but long-term, we are going to continue to make loans and find ways to help our clients weather this storm.

HREB: Regionally, what areas are handling the recession best and have companies that are continuing to land financing for commercial real estate activity?

JH: Most of the markets are suffering some type of stress. There has been rampant job loss, consumers are saving, not spending — we have to get the consumer back in the position where they have liquidity and are willing to spend. Only then will retail sales to pick up, which will allow malls and shopping centers to sign new tenants and fill their space, which then retailers make their rents and possibly expand.

I like the Midwest. I love the cities; they are well-grounded with long histories. They have their ups and downs, but Chicago, Milwaukee and Minneapolis are still good long-term plays.

HREB: What are your thoughts on how commercial real estate is going to weather the impact of the large loan maturations that are on the horizon?

JH: That is a very good question, and when I am out with clients or in meetings, it comes up frequently. One thing this scenario had done is spur the industry to find a solution. My thought is that we will find another mortgage program. The industry has to find a program that makes lending attractive, profitable, and once again acceptable for companies to place long-term debt on properties, and feel comfortable doing it.

There are going to be a number of banks that will step up and have the ability to help out over the next year or two.

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