Westchester County’s business community, like the vast majority of its suburban counterparts in regions across the country, has been faced with dramatic changes over the past several years. Some changes have uniquely impacted the commercial real estate industry.
Pandemic-era economic forces such as supply chain bottlenecks, labor shortages, spiking inflation and interest rate hikes designed to reduce inflation, and decreased lending from some small and mid-sized banks have made it more difficult to complete projects on time and under budget. The health of the local economy depends on the strength of Westchester’s commercial real estate sector. We are inspired by the tremendous resilience it has shown in the face of many daunting hardships as it continues to shape and define the region.
Among the most drastic industry challenges driven by the pandemic were paralyzing supply chain issues and skyrocketing material costs, which many developers and construction contractors were relieved to see subside somewhat after significant initial disruption.
For the most part, builders are continuing to experience a labor shortage as companies struggle to find quality workers and deal with substantially increasing wages. This can be acutely problematic for contractors, resulting in higher labor costs and projects not being completed under deadline. A failure to fulfill a contractual obligation can not only cost a company money, but negatively impact its reputation as well. White hot inflation – rising above 9% last June – and the Federal Reserve’s decision to increase interest rates to the highest levels in 22 years, have sent borrowing costs soaring for developers. Making these troublesome trends worse was a recent period of instability in the banking sector, freezing access to lending and credit for many builders at some small and mid-sized banks.
We appreciate the unique challenges that members of the commercial real estate industry are experiencing because Orange Bank & Trust has considered itself a reliable partner of the local business community for more than 131 years. We believe we have a proven track record of forging deep relationships with a diverse range of industry players and helping them drive smart growth in our communities, from small-business owners, electricians and painters, to home-builders and developers of high-rise hotels and office buildings.
We maintain more than $2.4 billion in assets and more than 70% of our loans support the commercial real estate sector. With an overall loan portfolio of just over $1.7 billion, roughly $1.1 billion of this amount is secured by commercial mortgages on investment real estate and another $200 million of commitments support small-businesses and investors affiliated with a variety of construction trades and real estate development. We understand that the commercial real estate sector is essential to the economic wellbeing of the region, and we’re deeply invested in its success.
No one can be entirely sure what the future holds, but having worked alongside our borrowers and gained wall-to-wall understanding of their businesses – the types of community-focused real estate developments being considered across the county, projects they’re bidding on, and their full lifecycle cash needs – provides us with some critical insights.
In the current economic climate, it’s important to “control the controllable,” because there are many levers of uncertainty that fall outside of our command. For businesses, it all revolves around operating leverage and mastering cost structure:
- Be meticulous in the bidding process for new projects;
- Anticipate and avoid certain projects that will not support the bottom line;
- Don’t underestimate borrowing, operating and labor costs;
- Uphold capital and liquidity as much possible; and
- Understand the full lifecycle of a project and lock in profitability, or get as close to it as possible.
Looking ahead, it’s plausible that borrowing, material and labor costs will continue to be elevated for some time forcing many in the industry to keep operating on thin margins. As a key contributor to the Westchester small-business economy, we look at each loan opportunity on an individualized basis and believe if you’re willing to dedicate the time to evaluate a business carefully and forecast it accurately, you can prudently grow the portfolio over time. That’s wise investing, and as a bellwether for the local business community, we are excited about more opportunities to continue supporting impactful real estate projects, and other efforts that move this vital sector forward.
Michael Coulter is executive vice president and chief lending officer at Orange Bank & Trust Co.
