Area banks respond to Federal Reserve Survey on lending practices

Tighter standards and weaker demand for commercial and industrial loans (C&I) were among the highlights of the April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices released recently by the Federal Reserve. 

Banks likewise reported tighter standards and weaker demand for commercial real estate (CRE) loans. 

“With the fight against inflation, this sort of thing happens so it’s not surprising to see our peers experiencing the same things as we’re experiencing here at Peoples,” said Jeffrey Drobins, executive vice president, chief lending officer at Peoples Security Bank & Trust Company. 

“Really, it’s probably the prudent thing that business owners who predict there could be a recession are not looking for credit, they’re holding on to cash. They’re worried about liquidity and leveraging their balancing sheets. Even our existing customers, that’s what we’re seeing them do.” 

Rory Ritrievi, president & CEO at Mid Penn Bancorp, Inc., and Mid Penn Bank, said that through the first quarter of 2023, their organic loan growth had annualized growth of around 11%. 

“That is at the top end of the range we projected for the year even though historically the first quarter is our slowest loan growth quarter of any year,” said Ritrievi. 

“As a publicly traded company I cannot give loan growth numbers beyond that first quarter as we have not made any of the numbers past that point public, but I will say that our loan pipelines are just as brisk in the second quarter as they were in the first.”

Three sets of special questions comprised the April 2023 Senior Loan Officer Opinion Survey (SLOOS): 

  • Changes in banks’ lending policies for CRE loans over the past year. 
  • Reasons for banks changed standards for all loan categories over the first quarter of 2023. 
  • Banks’ exceptions for changes in lending standards over the remainder of 2023 and reasons for these changes. 

Banks responded to the first of questions by reporting tightening lending policies for all categories of CRE loans over the past year. Wider spreads of loan rates over banks’ cost of funds and lower loan-to-value ratios were the changes most frequently reported. 

In response to the second set of questions, banks cited a more uncertain or less favorable economic outlook, reduced tolerance for risk, deterioration in collateral values, and concerns regarding banks’ liquidity positions and funding costs. 

The third set of questions concerning banks’ outlook for lending standards over the rest of 2023 led to banks reporting an expected tightening of standards across all loan categories. An expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns regarding bank funding costs, bank liquidity position and deposit outflows were cited frequently by banks as reasons for their expectations of tightening lending standards for the remainder of the year. 

Survey results, as they have been in past releases by the Fed, are tabulated for two domestic bank size categories consisting of large banks and other banks. Large category banks contain $50 billion or more in domestic assets as of Dec. 31, 2022. All other banks have less than $50 billion in domestic assets. 

The largest banks are defined as those with $250 billion or more in total domestic assets as of Dec. 31, 2022, and mid-sized banks as those with assets between $50 billion and $250 billion. Mid-sized banks reported more frequently than the largest or other banks the tightening in standards for business loans, these reports were for both for the first quarter and in expectation for the rest of 2023. 

Mid-sized and other banks reported concerns about their liquidity positions, deposit outflows, and funding costs more frequently than the largest banks, as reasons for tightening standards on all loan categories, both in the first quarter and for the remainder of the year.

Is the rise of coworking space good for the commercial real estate market?

Coworking office space is bringing changes to the commercial real estate landscape. PHOTO/GETTY IMAGES –

There’s no doubt the concept of coworking space is a trend in commercial real estate that is growing in popularity.

Younger professionals like the flexibility and socialization they receive in such a work atmosphere and landlords with vacant space to fill find it’s a promising alternative to the traditional long-term tenant lease.

Loren Keim, owner of Century 21 Keim Real Estate in Allentown and real estate professor at Lehigh University said coworking has become a significant disrupter in the commercial office real estate market, even though it only currently controls 4% to 8% of the office space in the major markets, where you’ll find most co-working space, and is even a smaller percent of office space in the Lehigh Valley.

It’s the way such spaces are changing the dynamic of leasing office space that he said is having such an impact.

Keim describes coworking space companies like WeWork as the AirBnB of the office market.

“These users aren’t locked into a long-term 3, 5 or 10 year lease like in the past,” he said.  “They want the perks of nice space but can’t deal with the long-term lease.  They occupy space based on their variable need for space, although the cost to them is higher.”

Coworking space, of course is nothing new, but technology is making it easier to work remotely, he said.

Social and equipment needs are keeping some from wanting to work from home. That makes coworking space an increasingly attractive venture. And coworking spaces are popping up in what had been, or could have been, traditional office space.

There are coworking spaces throughout the Lehigh Valley, mainly in urban cores such as Allentown, Bethlehem and Easton.

Keim said there’s both positives and negatives to the changing office space dynamic.

“On a landlord’s side, it’s unused space that you just created a use for and you can get more tenants in quickly,” he said. “Leasers like the flexibility. They can come and go as they will.”

However, landlords often find it’s harder to get financing for space intended for coworking as compared to a traditional office with a long-term tenant.

The landlord needs to put money into a space upfront to build it out for the tenant. So a 5-year lease is generally required to justify that expense.

With a coworking space there is generally no long-term leasing contract. So, there is more risk to the landlord.

Keim said there are different viewpoints on whether or not the proliferation of coworking space, versus traditional office space, will be successful long-term. He said much is depending on if you’re a large landlord, a tenant or a lender.

From the perspective of a landlord, if they lease a large space to one tenant and that tenant disappears, the landlord will lose the entire income from that space until it’s re-rented. There is also a cost to renovate and re-lease that could be significant.

The advantage of a coworking space is that it’s a shared risk for the space by having many small tenants.

However, in many cases, the landlords of the property do the renovation for the office space for a client that then will sublet the space to much smaller firms or individuals.

A large part of risk is on the landlord who fronts the money for the renovations and doesn’t know if the sublease to the co-working company is going to be able to generate enough revenue or tenants to make the space work.

That risk makes lenders more hesitant to finance the project.

Fiscal fears don’t seem to be slowing down the growth of the coworking space concept.

“We are seeing more of this in the Lehigh Valley.  Office Quarters and Regis are examples of shared space,” Keim said.

More landlords are seeking advice in converting portions of their space to coworking, he said, and real estate professionals, such as himself, are heading the call.

“We have some team members in our commercial real estate department that we call Flexsperts.  They work with building landlords who have interest in reconfiguring their leases to create co-working space in their buildings to generate more revenue,” he said.  “Our goal is to assist clients in using their space strategically. The concept is a strong one and will likely continue to expand over the next few years.”

FDA approves Olympus’ redesign of device once linked to infections

The U.S. Food and Drug Administration cleared Olympus Corporation of the Americas to sell a revised version of a medical device used to examine a patient’s internal organs. Olympus revised the device, called a duodenoscope, after it was linked to outbreaks of a potentially deadly bacteria.

Olympus Announces FDA clearance of the TJF-Q190V Duodenoscope with Sterile, Disposable Distal End Cap. designed to improve patient safety. -PHOTO/SUBMITTED

A duodenoscope is used to diagnose problems and perform therapies on the bile ducts, pancreas and duodenum. The FDA warned duodenoscope manufacturers, Olympus, Pentax and Fujifilm in March of 2018 that the companies must improve the safety of the device or the FDA would take additional action, such as injunction and civil money penalties.

The device was linked to carbapenem-resistant enterobacteriaceae, strains of bacteria resistant to most antibiotics used today. Enterobacteriaceae infections are common in health care settings, and were responsible for 13,100 infections and 1,100 deaths in the United States in 2017, according to the CDC, the national public health institute.

Olympus’ new version of the tool features a sterile, disposable distal end cap, according to a news release from the Center Valley-based biotech company.

The new device is designed to be easier to clean, reducing the risk of contamination. Olympus will also perform periodic inspections and maintenance of every duodenoscope.

“Infection prevention is an ongoing mission that we at Olympus are committed to fulfilling,working in partnership with our customers, medical societies, and regulatory authorities to keep patients safe…,” said Kurt Heine, group vice president for endoscopy at Olympus,


What can you do with an empty big-box?

Large store vacancies, such as this one in Bethlehem Township, often remain vacant for years. (Photo By Brian Pedersen) –

The large, vacant structures loom over many empty parking lots dotting retail landscapes throughout the Greater Lehigh Valley. They are the former homes of Kmart, Sears and BonTon.

The once thriving big-box retailers are now desolate spaces marked with inactivity that stretches into months and even years. They beg the question, what do we do with these large, vacant spaces?

While they appear to be eyesores of a bygone age, the land they occupy is valuable for reuse as something.

While brick-and-mortar retailers struggle with declining foot traffic and sluggish sales thanks to online competition, the physical store is far from dead.

But as more and more of these large-footprint stores fade from the retail landscape, their replacements will look a little different. Some may be rezoned for industry, others could become parks and green space, and some will be reborn for retail use in a more specialized or entertainment-focused manner.

“I think the shopping centers in the valley that have Kmarts and other large [vacancies,… are going to get downsized,” said Steve Cihylik, a broker for Howard Hanna The Frederick Group of South Whitehall Township. “You can’t retool them because of the dimensions. You can’t multi-tenant a box like Kmart or BonTon because of the size of it.”

This opens the potential for new uses that can include Amazon opening grocery stores or companies acquiring space to cook food for several restaurants for delivery to consumers, he said.

“With the increase in food delivery, there are companies opening up a kitchen and cooking for five or six restaurants,” Cihylik said. “There are restaurant groups that have a separate kitchen producing products only for delivery. These are all potential candidates for a ‘pad site,’ a portion of a site.”


Starting over

For empty big-box sites, developers would likely turn to the wrecking ball and build something new because it’s too difficult to reuse them, Cihyik said. Then developers can create entertainment and retail centers similar to what the owners of the Lehigh Valley Mall did. They added a Bonefish Grill, an Apple store and several other tenants that are separate from the mall, but close by.

For the Phillipsburg Mall, which has seen a large number of tenants vacate, including major anchors, Cihyik envisions some light industrial uses going into the indoor mall,.

Developers are becoming more and more reluctant to build large retail stores because of the expense of real estate, and the time-consuming process of getting the plan approved, he said. The land under those old retail sites becomes more valuable every day because it’s already an approved use, he said.

“It takes years,” Cihylik said, noting it took eight years for Hamilton Crossings to see the light of day.

That project, which opened in 2016, involved the construction of a massive shopping center in Lower Macungie Township, that includes nearly 560,000 square feet of retail space.


Thinking outside the big box

These outdoor malls, sometimes referred to as lifestyle centers or power centers, differ from the traditional indoor malls and appear to be doing better. Hamilton Crossings may include familiar department stores such as anchor tenants Target and Cosco, but it also has restaurants, Whole Foods and pedestrian paths that encourage walking.

Tim Harrison, who developed Hamilton Crossings along with The Goldenberg Group, said there is a range of options when considering what to do with large, vacant retail sites.

On one end of the spectrum, developers often repurpose an old retail use with a new retail use, or they could demolish the old structure and build a new space, such as multi-family homes or townhouses. A former department store could become home to a large food store.

“There are all kinds of options within the spectrum,” Harrison said. “A lot of what you see is space repurposed.”

Vacant department stores often find new life as space for entertainment, such as indoor athletic fields, miniature auto race parks, trampoline parks, climbing gyms, or indoor soccer fields, he added.

“The space might be divided into smaller spaces such as a food hall or a series of restaurants,” Harrison said.

Sometimes, these buildings become houses of worship, or health care and educational facilities. Another option is back offices for large companies, he added.

“As the internet becomes an ever more popular tool for facilitating retail sales, it’s become painfully obvious that we are substantially overbuilt from a retail standpoint,” Harrison said.

There is still demand for large retail stores but in very limited locations, he added. This is true for underserved areas, such as food deserts, communities with less affluent populations where people cannot easily access a grocery store.

“You have a substantial number of areas in neighborhoods that are underserved with grocery stores,” Harrison said. “The economics of operating in areas like that are difficult. It’s hard to make the numbers work. One solution is government and community support.”

Another example would be an affluent area where the barriers to new development are very high. In those cases, a retailer looks for years for a location and just cannot find one.


With closings come opportunities

Despite the ability of developers to find new uses for older, vacant retail properties, online shopping will continue to increase store closings, both big and small.

“The more that a particular retailer is selling what you could characterize as standard merchandise, there’s less reason to leave the comfort of one’s home,” Harrison said.

The retail sector is in an exciting time, said Jody King, first vice president of CBRE, a real estate firm in Upper Macungie Township. King represents property owners and tenants in retail centers, land development projects and medical office buildings. She sees retail spaces adapting to changing needs.

“People have to kind of reinvent themselves,” King said.

People of all ages who visit bricks-and-mortar retailers are looking for creativity and experiences, she added.

Medical use is a type of tenant King sees frequently taking over vacant retail spots.

“Most shopping centers were planned for high traffic, easy access, heavy parking, and the retail centers definitely have that mix,” King said. “We are also seeing gyms; we are also seeing things that you can’t necessarily get online.”

When considering how to reuse a large retail center, a building will often be divided up so that more than one tenant can take up the space, King said. This strategy allows retail centers to attract more people because of the diverse offerings.

She also doesn’t see traditional retail bricks-and-mortar sites disappearing entirely. Nordstrom recently opened a store in New York City, and stores such as Target offer online merchandise pickup at their stores.

“I think the Lehigh Valley has really done a great job adapting to what people need,” King said. “Landlords have to be adapting their shopping centers to bring in those people.”


Don’t write off malls yet

Is there still a place for malls with the increase in store closures?

Stephanie Cegielski, a spokesperson for The International Council of Shopping Centers, a global trade association of the shopping center industry based in New York City, shared some details about what she’s seeing on the national level.

“Closures are not indicative of the overall health of the industry, which is strong,” Cegielski said.

More than 90 percent of sales still happen in physical locations and mall occupancy rates remain high. In addition, malls remain an important part of the communities they serve.

As they adapt to changing demographics and community composition, they are increasingly becoming venues for entertainment such as concerts and fashion shows and have co-working, health care and fitness facilities, she added.

“Retailers are increasingly experimenting with different store formats including smaller footprints, placing less inventory on the floor and temporary leases like pop-ups,” she said.

Large vacant retail spaces have many options, she added.

“What will go into big box locations varies based on the needs of the community,” she said. “We’re seeing grocery, fitness and other non-retail tenants moving into shopping centers. A large space can also be subdivided to accommodate several retailers.”