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How One Major Bank Plans to Grow its Real Estate Lending Market Share as Rivals Pull Back

TD Bank’s newly appointed head of U.S. commercial real estate Hugh Allen notes the old adage: “You make your best loans in difficult times.”

This year has been a challenging one for banks with significant real estate holdings on their books. The collapse of Signature Bank and First Republic Bank this spring rippled through the entire regional bank sector just as higher interest rates created doubts about some real estate borrowers being able to refinance their loans when they came to maturity. As months went by and concerns about the scope of potential defaults in the commercial real estate industry lingered, a number of regional and community banks have pulled back on their real estate lending to shore up their financial health.

For other lenders, however, including national and international banks, the current environment can become a time of opportunity. For example, executives with national player TD Bank, a subsidiary of Toronto-based multinational TD Bank Group, believe they might be able to pick up more market share in the real estate lending sector and establish new relationships with highly-sought after clients as some of their competitors curtail their activity.

In early November, TD Bank appointed Hugh Allen as head of U.S. commercial real estate. Allen, who has 30 years of experience in the banking industry, previously oversaw commercial, small business and retail banking for TD Bank in his role as regional president for Metro Mid-South. recently spoke to Allen about the pain points bank lenders are currently facing, TD Bank’s opportunities for expansion and his outlook on the most reliable property sectors.

This Q&A has been edited for style, length and clarity. Obviously we are seeing a lot of headlines right now with concern about the health of commercial real estate, including some concerns voiced by the Federal Reserve. I wanted to get your outlook on how healthy you feel the commercial real estate market in the U.S. is today? Are there some pain points you are particularly concerned about?

Hugh-Allen.jpgHugh Allen: I don’t know if I am going to have anything extremely different from what everybody else is saying in the marketplace. Obviously, the higher interest rates have created great concern with loans that were originally underwritten at lower interest rate levels and how they are going to be able to perform.

The office loans are a concern, especially in the coastal markets of New York, Los Angeles, San Francisco. The return to office, office utilization continues to be of concern. One thing we’ve [looking at] trend-wise is how folks are going to be able to hang in there until we see interest rates subside. Obviously, default rates are elevated, especially in the CMBS non-recourse market. We see a lot of activity there that’s not good. Of particular concern have been regional banks. And we understand that some regional banks have pulled back on their commercial real estate lending. I was wondering if TD Bank was looking at any opportunities that might be left in the market where those banks might not be doing as much business?

Hugh Allen: We see it as a great opportunity for us. We are probably one of the best capitalized banks in North America right now. We are not without challenges, but we feel pretty good about our real estate portfolio. As such, we see some of this as an opportunity with strong sponsors who may not have relationships with TD or have limited relationships with TD for us to penetrate and gain market share in a very cautious manner, on terms that are favorable to TD Bank.

There is a saying in banking that you make your best loans in difficult times. You’ve got to have the capital and the platform to be able to do that. We are going to be very selective, but we see this as an opportunity, with a lot of banks having capital challenges and making the decision to shut off their spigot when it comes to commercial real estate lending. And we are seeing opportunities in real time. It’s not as robust of a pipeline of opportunities that you may have seen a couple of years ago, but it is a steady stream. And again, the overall structure of those opportunities is very favorable to the bank. You mentioned that you will be looking for strong sponsors. Are there any details that you can give me in terms of—we are looking to gain market share in these geographic markets or maybe in these sectors? Are there some themes in terms of what you might be looking for?

Hugh Allen: It’s really on a case-by-case basis, it depends on who the sponsor is, it depends on where the project is. Obviously, we don’t want to go and do an office deal in a declining office market, so we are not going to do something like that. But where opportunity does present itself with the right product type in a strong market where the regional banks are weakened and they are not willing to take on additional exposure, with high quality sponsors who have a good track record and have been through the cycles many times, that’s where we are going to find the opportunity to do a well-structured deal and maybe acquire more market share with that client. Are there any parts of TD Bank’s existing commercial real estate loan portfolio that you might be looking at and thinking that it might make sense to divest of at some point?

Hugh Allen: If you are referencing where a lot of banks are doing loan sales, that’s something we are not in the process of doing at this time. We see a lot of our competitors, and a lot of regional banks, in that arena right now.

It’s kind of a mix. We see some selling loans because they are the most marketable and they don’t have to take a haircut on the portfolio because it is a strong portfolio in an effort to raise capital. And then you see the other end of the spectrum where folks are just trying to get rid of whatever problem assets that they may have. We see that in the marketplace, but we are currently not entertaining sales. In terms of demand for both new loan originations and renewals, how much demand are you seeing relative to where it was last year?

Hugh Allen: It’s down. It’s harder, given the higher interest rates to get [deals done]. New construction deals are off, it’s harder to get the deals to pencil. From a return perspective, for the equity as well, to provide the appropriate amount of debt service coverage for the debt piece. So, a lot of deals are on the sidelines right now.

We are seeing activity in our REIT book. A lot of proactive recaps are starting to occur, folks are getting ahead of their 2025 maturities. We are seeing some activity there. And again, people who own existing properties, probably like a term loan, their incumbent bank is no longer looking to renew, we are seeing a lot of that activity, a lot of it is a pass because the numbers don’t work in a higher interest rate environment. But where there’s good solid equity on the front end or the property is performing because of where it is, that’s where see an opportunity to step in and be a capital provider for those in need. TD has a substantial portfolio of affordable housing and workforce housing loans. Can you tell me what are some other types of loans that are included in the larger commercial real estate bucket?

Hugh Allen: We’ve got exposure to all the primary food groups—multifamily, industrial, we do have some office, affordable housing. We don’t have very much in the hospitality space. Most of our hospitality exposure is going to be via our exposure to the REIT world. But primarily the big food groups we are in, we have retail exposure.

Obviously right now everybody is concerned with the office exposure and we are monitoring that extremely closely, mitigating the risk around that and being good stewards of our balance sheet. Just making sure we are staying well ahead of any challenges in our office portfolio. But overall, I am really happy with where our portfolio composition is and what we’ve been able to do.

We’ve seen tremendous need for affordable housing, more so now than ever given where interest rates are. There continues to be significant demand in the marketplace for affordable housing and housing that’s been subsidized. We see a lot of activity by municipalities to wicker together capital stacks to help fund it and we’ve had great success in supporting those endeavors. What, in your view, are going to be some of your biggest challenges in the current marketplace?

Hugh Allen: Like any other bank, the greatest challenge is just making sure you are doing monitoring of the portfolio and its health, getting ahead of any risks that may elevate as part of that ongoing process. Governance control is very, very importance at times like these. Our credit management platform does a really good job of staying on top of our credit and making sure we are proactive in every way we can be to mitigate risk when we identify it.

I think it’s going to be the biggest challenge for all of the banks just managing the portfolios through elevated interest rate environment.

Hopefully we’ll see some relief toward the end of next year in rates for folks who are hanging on and hoping to get to a little bit better interest rate environment to maybe take advantage of their deck capital. That’s really the most important thing right now, being good stewards of our balance sheet and making sure we are staying on top of risk mitigation. Many people were hoping that by this time there was going to be some relief in the marketplace and a resolution in the bid/ask gap between sellers and buyers in the investment sales market. Are you seeing any signs of that?

Hugh Allen: Not especially, no. Again, it’s all interest rate driven. And the buyers, when they assemble the capital stack, to get the returns necessary and to be able to cover the cost of the capital, we’ve got to see interest rates come down, normalize a little bit before you will see a pick-up in investor activity.

And I do think, personal opinion, when we get to a point where rates do start to move, there’s going to be a bit of pent-up demand. There’ll be an initial wave of pent-up demand. I don’t know how far rates are going to have to move to trigger that, but that’s just one person’s opinion. Do you have a sense of how banks might handle loan delinquencies and defaults as they tick up this time around? During the last cycle there was a lot of extend and pretend. What do you think might be the overriding approach this time around?

Hugh Allen: I don’t know if I have an answer for you on that. I don’t want to get over my skis and speak for the whole industry. I think things will start to reveal themselves a little bit more as we get into the first quarter of 2024. I think the bigger banks are probably taking a more measured approach. You may see the smaller banks not quite reacting as swiftly. Can you talk a bit more about the real estate sponsors that TD Bank currently feels comfortable with? You mentioned you are looking for people with experience. Can you get a bit more granular in terms of what you want to see if you are going to work with a sponsor?

Hugh Allen: We have folks we do business with where we are able to gain market share where we feel great comfort with them. We’ve got a track record with them and they’ve performed throughout the cycles.

There are some folks out there who we don’t have experience working with, but we have been admirers from afar, it’s not from a lack of calling efforts. These are folks who may have been house accounts with other banks. I am not going to go into the particular details, but we have an opportunity with a very established middle market real estate firm that has been a house account with one of the larger banks in the U.S. for many, many years. And now that bank has signaled that their appetite has changed and now there is an opportunity for us to step in and provide capital where it used to be someone’s house account, where they have an exclusive relationship with the bank. Those are the opportunities that personally I am excited about.

Obviously, they are house accounts for a reason. They are very well thought of, they’ve got longevity in the business, they’ve been through the cycles, they are in an asset class that we find attractive. And opportunities to be able to do business with them structured in a very thoughtful way allows us to now add them to our roaster of clients, whereas before we were being boxed out because of the house account relationship that they had with a large competitor. Those are the ones that get me most excited.

But I get excited as well about the relationships that we have with existing clients. Is there anything else that you feel is important for people to keep in mind?

Hugh Allen: The only thing I would add is I am new to the role [as head of U.S. commercial real estate], but not new to commercial real estate. The majority of my career has been in commercial real estate, so I am excited to be getting back into it. And despite it being a challenging time for the industry, I am very excited to be back in the business and provide the leadership that I can for our efforts.

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