October 24, 2023
- Charles’ journey from the banking industry to credit unions and how it changed his perspective on lending.
- Alliant’s focus on commercial real estate loans, including multifamily, student housing and hospitality.
- The impact of the refinancing cliff and the potential for commercial-to-residential property conversions.
- Serving Alliant’s members and forming corporate relationships to expand reach.
- Not letting fear deter lenders from deploying their balance sheets.
- Opportunities in commercial and residential lending despite market uncertainty.
- The importance of understanding consumer finance to better grasp the prospects for commercial real estate.
In this episode
[00:00:00] Charles: With solid credit, you look at the consumer and you can get caught up in some of the headlines. But overall, my goodness, the consumer has been resilient and there’s a lot more in savings than there was in 2019. And the consumer drives the health of our economy, drives the prospects for commercial real estate.
[00:00:24] Charles: You’re listening to 22 Minutes in Lending, your go to podcast for insights on all things lending, from lending practices, regulatory updates, how to enhance lending efforts, and more. In each episode, host Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry.
[00:00:44] Charles: Let’s dive into the latest in lending. Welcome everyone to 22
[00:00:48] Vince: Minutes in Lending. I’m your host, Vince Passione, and I’m happy to introduce our guest, Charles Krawitz, Chief Capital Markets Officer and Head of Commercial Lending at Alliant Credit Union. Charles has over 30 years of experience in the financial services industry and prior to Alliant Credit Union has held C level positions at ABN Ambro, KeyBank, and Fifth Third Bank.
[00:01:06] Vince: He has received multiple accolades in the world of lending and commercial real estate. I’m excited to hear his insights over the next 22 minutes, Charles, thanks for joining
[00:01:13] Charles: the podcast. Vince, I am thrilled to be speaking with you this afternoon. Wonderful.
[00:01:20] Vince: Well, first let’s start off lots of experience on the banking side, wound up on the credit union side.
[00:01:24] Vince: Can you talk a little bit about the journey between banking and credit unions and how it sort of changed your perspective of the industry on the lending
[00:01:31] Charles: side? So Vince, I would say my career has been an interesting one, primarily in commercial real estate finance. I’ve And the things that have really propelled my success are being super inquisitive, empowering people that I work with, trusting the people that I work with, valuing them and being incredibly both forgetful and forgiving.
[00:01:54] Charles: I got out of undergrad at University of Illinois with a degree in finance in 1987, and I had received an inquiry. There were three big real estate syndicators at the time, VMS, JMB, and Belcore. And JMB solicited me and said, we have this management training program. You should come and interview with us.
[00:02:17] Charles: We’re going to hire 10 people nationally. I go to their offices at 900 North Michigan, Chicago, and wow, this is an impressive place. I’m young and impressionable and decide this real estate thing is for me, but more so than anything else, I was always interested in the built environment. And how that built environment shaped personalities and shaped our day to day kind of dynamic interaction.
[00:02:44] Charles: So, I was all set to head into a career in commercial real estate when JMB came knocking. Unfortunately, that did not materialize, but soon thereafter, Belcor, who was bought by American Express. Little did I know that the tax law of 1986… Tax Reform Act had gone into place and had done away with accelerated depreciation and all those syndicated businesses were predicated on accelerated depreciation more so than on real estate fundamentals.
[00:03:18] Charles: But that’s how I started in the industry. Along the way, worked for some very dynamic mentors. One of which I’d love to shout out to GoldieWall. So, I’m at a company called Rubloff. I’m their office leasing team. I’m an entry level analyst. We have a separate room where the two PCs reside. And there’s one other analyst, myself, who actually know how to turn on a computer.
[00:03:45] Charles: And we could model the occupancy costs at building A versus building B versus building C and graph it out, which was an incredible accomplishment at the time. Goldie Wolfe is the dominant office leasing broker in the city of Chicago. She leaves RubleOff, starts her own company, asked me to come with her.
[00:04:05] Charles: I’m her director of finance. I’m 22, 23 years old. I’m thinking, nice title for a 23 year old. One day she comes into my office and she says, Charles, I want you to be my director of marketing. I said, oh, Goldie, I’m your director of finance. I have a finance degree. She goes, well, you know what? You could be my director of finance and marketing.
[00:04:25] Charles: And I said, oh, I like that. Sign me up. What’s entailed? She goes, well, if you don’t get my name into the trade press every month, you’re fired fired. No, you know I don’t know how to do this. She was don’t worry. I will show you how and what she showed me was by reaching out to reporters and to editors and Arranging to meet with them take them to lunch meet them at a conference.
[00:04:50] Charles: Most people don’t proactively reach out to trade publication Editors, not only would I interact with these folks. I would come to the table with an outline of a story That’s quite a story. So tell
[00:05:05] Vince: us about a lion 1935, this was a credit union for United Airlines pilots, and now it’s a digital first
[00:05:13] Charles: credit union.
[00:05:14] Charles: Yeah, so credit unions are a neat place. I didn’t know much in 2017 about credit unions when I started speaking with Alliant. I knew Alliant. Had a national lending platform, which was odd. Very few credit unions do. So I was encountering that at mortgage bankers conferences and elsewhere, and that really piqued my interest in Alliant.
[00:05:36] Charles: And I was fortunate that they were looking for a new head of their commercial real estate group. Like most credit unions, Alliant at the time was focused on lending to what I would call real estate hobbyists. rather than real estate investors. It was the, hey, I’ve got some stocks, I’ve got some bonds, and maybe I should own that retail strip center down the street from me that I drive past every day, as opposed to someone who owns commercial real estate for a living.
[00:06:05] Charles: That’s what they do. And so I was able to get the job at Alliant. Very, very appealing because Alliance serves its members. We don’t serve shareholders. We’re a not for profit, works for the benefit of our members. Very different mindset, and it allows us to take a very long term view and try out some innovations.
[00:06:27] Charles: And like you said, we’re all digital. We don’t have any bricks and mortar. We transitioned from being a united members only platform to a much broader field of membership. We have over 800, 000 members currently and about 19 billion in assets. 2 billion of those are in commercial real estate loans.
[00:06:52] Charles: nationally, both on stabilized and to a lesser extent in an area that I refer to as loan on loan lending. So we have partnered with other lenders who are active in the construction space, active in the bridge space, and they go out and pledge their loan to me. It helps them lower their cost of capital.
[00:07:14] Charles: It puts me in a very protective position in the capital stack, and it allows me to diversify. The type of exposure that I have. So a very neat dynamic 2 billion commercial real estate book that on the term side is completely sourced through commercial mortgage brokers around the country. And we have been able to focus.
[00:07:36] Charles: primarily on some of the larger commercial mortgage brokerage shops, the Walker Dunlop’s, the CBRE’s, the JLL’s of the world, as well as some of the smaller, more localized shops. But success begets success. And we are a really neat alternative for these brokers to bring to their customers and complement to life insurance money.
[00:08:00] Charles: The CMBS money to traditional banking money to agency money. These brokers appreciate being able to bring a credit union loan into the equation. We’re non programmatic, so we are very much willing to listen to and understand the dynamics of each opportunity. What are the merits of it? What are the pitfalls of that?
[00:08:23] Charles: Can we structure a loan that meets the needs, wants, and sometimes desires?
[00:08:30] Vince: Lots being written right now about what’s happening in the commercial real estate business, right? And I hear a lot about this refinancing cliff. How real is this and what’s the impact to you and other lenders on the commercial side
[00:08:42] Charles: right now?
[00:08:42] Charles: I mean, there’s no denying it. It’s real. But a lot of cliffs have come and gone with it out of being so impactful. And I suspect that this approaching cliff will go the same way as many other historical cliffs have gone. I suspect that existing lenders will extend out a little bit, will amp up the principal paydown in exchange for extending out, but that will get past this current cliff without A lot of rigmarole.
[00:09:16] Charles: I hear
[00:09:16] Vince: lots about commercial real estate. We’re in New York City. The back to the office move really didn’t work. Less than 50 percent of folks, at least in the New York side, are back in the office. Big, big change. And we hear these discussions about commercial or residential conversions. And my daughter is living in the city, she’s 28 years old, so I’ve gone through the looking for an apartment in New York, so they certainly can get more of them.
[00:09:38] Vince: The big one in New York City is one Wall Street was just a big conversion that was done and it seemed to work with the footprint and the floor plate. Is that a panacea? Can it really happen? Can
[00:09:47] Charles: it help? I tend not to believe in paradigm shifts, but it’s really, really hard to think that office is not experiencing a paradigm shift.
[00:09:57] Charles: Can office buildings be converted into residential? Sure. It really depends on your basis in them. It really depends on whether there’s governmental money that’s available to help with that. To have a residential building sitting in a previous office corridor, there’s got to be a dynamic of place to make that a viable proposition.
[00:10:20] Charles: So I don’t know how many of these will happen. I think they’re very exceedingly expensive to do. I think subsidies are generally required to make them economically viable, but you really have to look at the broader. context of the area and what’s going to drive demand for that property on a go forward basis if people don’t return to neighboring office buildings.
[00:10:46] Charles: But I do think that we’re going to see increasingly a return to office in a more meaningful way that we have in the past. And the tide has definitely turned in favor of employers. Rather than the labor force, despite unemployment being at 3. 7 percent as we speak, I do feel the tide is turning and that employers who do want to The sense of place, we’ll start getting the upper hand.
[00:11:16] Charles: This is Ron Draper, CEO of Summerville’s Credit Union. So in 2014, we were looking for a turnkey student lending solution. One that was simple and efficient for our members to access. And eventually we chose LendKey because it just integrated seamlessly for quick member mobile access and was Easy to remotely review and approve from a loan officer point of view.
[00:11:37] Charles: And I should know because I’m that loan officer. I still recommend Lanky to people whenever I get the chance, because after almost a decade, it continues to offer consistent product and service delivery, both to our membership and to our staff.
[00:11:53] Vince: And office is not a huge part of your portfolio. It’s hospitality.
[00:11:57] Vince: It’s residential,
[00:11:58] Charles: multi unit residential. Yeah, so fortunately it’s under 3 percent of our book. I’ve never been a huge fan of office. The tenant improvement, the leasing commission dollars necessary to secure that cash flow has always been one that’s caused me a little bit of pause. So because of that, we have very, very little office.
[00:12:17] Charles: A lot of the office that we do have, I would characterize more as the mixed use industrial with maybe 30 percent office associated with it. So we’re in good standing in that respect. Significant amount of multifamily, student housing, mobile home parks, RV parks, and yes, one glamping community. I was very, very hesitant, had a long track record of lending in the mobile home park space, the manufactured housing community space.
[00:12:48] Charles: I know that space really well. I’ve always shied away from RV. One of my originators who I go back with actually to childhood had convinced me of the merits of an RV park. I said, okay, we’ll do one. We’ll do one and see how that goes and one turned into more because it did go well. And then at some point that morphed into, Hey, will you try a glamping community?
[00:13:12] Charles: And so we did do one glamping community. It’s a very Binary proposition. It either works or it’s just a beautiful field in the middle of rural Oregon. So something that I’m glad I didn’t get over my skis on. So
[00:13:27] Vince: in February, you guys announced record breaking loan growth and deposit growth. As I talk around the industry, right, liquidity is definitely a concern, and it’s on the minds of most CEOs and most credit unions and most banks.
[00:13:40] Vince: How did you grow deposits? I was doing my research. It said you grew deposits by two and a half percent. And loans by 48 percent last
[00:13:47] Charles: year. If I got that right, I think those numbers sound relatively right. I don’t have them offhand. I would tell you in commercial real estate, that growth number was even higher.
[00:13:58] Charles: And it goes back to one of my prior answers. Success begets success. We have focused in on large, very established commercial mortgage brokerage firms. And you do a deal for a CBRE office in Phoenix and suddenly word gets around and you’re doing another CBRE deal in Chicago and one in New York, etc. So that has helped us over the last six plus years that I’ve been at the helm here, establish credibility.
[00:14:27] Charles: and engender trust and offer sought after solutions for borrowers. On the depository side, Alliage is a great place to bank. We don’t charge any overdraft fees. I believe the industry last year, the financial sector last year, generated over 7 billion worth of overdraft fees. We don’t charge. Overdraft fees.
[00:14:50] Charles: We exist, again, for the benefit of our members. We don’t have any commercial deposits. So we have a very diversified depository base. Like I said, over 800, 000. Members, we don’t have the cost of brick and mortar. And so we take that dynamic and we funnel it back to our members in the form of lower interest rates on loans, on auto loans, on home loans, on HELOCs or big recreational vehicle lender.
[00:15:19] Charles: So lower rates in comparison to the market, generally speaking. And, uh, generally speaking, higher interest rates on savings accounts and things like share certificates, which is another term really for CDs. And again, I’ve revealed our secret sauce and how we can do that as an organization.
[00:15:37] Charles: And we also proactively go after what are called SEG, select employee groups. So United Airlines, as you pointed SEG.
[00:15:49] Charles: You had to be a United employee to be a member of a line credit union. Now there’s a lot of other companies that have come along and we’ve entered into a relationship with that are very concerned about the financial wellness, health, financial health of their employees. And they see being able to bring Membership and Alliant to the table as a great employee benefit.
[00:16:13] Charles: So very active in expanding our reach through forming these corporate relationships and bringing our suite of first in class products to their employees. in addition to some of the other product offerings that I just rattled off, you
[00:16:34] Vince: and sell loans and our c o talks all the time about the need for originators to originate, but also to sell an occasion.
[00:16:41] Vince: And you buy loans from other originators. Obviously you deal with mortgage brokers, but you do. Beyond that, you work with other financial technology firms and acquire loans and then sell them. So what advice would you give folks today that have liquidity but are concerned because. We see an awful lot of deal flow for sale, but not a lot of
[00:16:58] Charles: buyers right now.
[00:16:59] Charles: I would say don’t let fear get the better of you. Interest rates are awfully high. You’re going to be kicking yourself down the road if you do not appropriately deploy your balance sheet. There is no better time now than to be finding lending opportunities. Look, on the commercial side, I always find periods of perceived distress to create great opportunities.
[00:17:24] Charles: I love it. When capital pulls back and I can structure deals a little bit more conservatively and go after even better healed commercial real estate borrowers and Properties that I may have previously lost to a different lender. So Opportunity is knocking both in commercial real estate, but also in consumer and residential lending and financial institutions.
[00:17:52] Charles: I get why they read the headlines and they’re skittish, but at the same time, they should have fortitude. They should be out there saying, these are going to be some of the best loans that we’re going to make for years to come. So I guess, Vince, it comes down to we’ll get it while it’s
[00:18:07] Vince: hot. I think it definitely takes that kind of foresight.
[00:18:09] Vince: to say, and this too shall pass. And these are probably the highest rate loans you’re going to get for a while, but really great
[00:18:15] Charles: insights with solid credit. You look at the consumer and you can get caught up in some of the headlines, but overall, my goodness, the consumer has been resilient and there’s. A lot more in savings than there was in 2019, and the consumer drives the health of our economy, drives the prospects for commercial real estate.
[00:18:35] Charles: I’ve been spending a lot of time lately really trying to understand the consumer and consumer finance as a way of actually understanding commercial real estate in a much more dynamic fashion in a granular way that I’d never had in the past.
[00:18:51] Vince: Well look, tremendous insights. Real quick, we talked a little about history.
[00:18:55] Vince: I love reading history. I always love to ask the guests, so, tell me a little about your sort of favorite figure in history, and why.
[00:19:03] Charles: So my answer there is really, really trite. It’s George Washington. I’d love to meet George Washington in the context of having science somehow reincarnate George Washington and having him sitting down at my kitchen table.
[00:19:19] Charles: So 250 years later, what would George Washington make of our world? I mean, you think the refrigerator, the dishwasher, the television set, the computer on my counter, my electric car. How would George Washington perceive today’s world? And then you think, how would we perceive the world in 250 years hence?
[00:19:41] Charles: I’m sure when George was alive, if you asked him what the world was going to look like 250 years out, it would have probably been something that he could firmly relate to. I don’t think he would be able to relate to our present world, particularly with how enamored we were. with the British monarchy and the changes there.
[00:20:02] Charles: So that would be my answer. George Washington, only in the context of sitting down and having a visit into the contemporary world. Yeah,
[00:20:11] Vince: we’ll be talking about that in a couple of years. We’ll talk about generating AI as well. Things are going to change pretty quickly. Well, fantastic insights, Charles.
[00:20:18] Vince: Thank you so much for the time you have for today. For our listeners, I hope you enjoyed the discussion. Make sure you subscribe so you can join more episodes and I’ll meet you all back here for our next 22 Minutes in
[00:20:28] Charles: Lending. Thanks again. Thank you, Vince. Appreciate it. Thank you for listening to the 22 Minutes in Lending podcast.
[00:20:35] Charles: We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, please be sure to subscribe and leave us a five star review.