A panel convened by NJBIZ featuring four industry leaders – all with unique perspectives – explained how businesses can navigate a complex economic time in banking and finance.

Those panelists were: Gregory Garcia, executive vice president and chief operating officer, First Commerce Bank; Martin Melilli, commercial market president, TD Bank; Bernel Hall, president and CEO, New Jersey Community Capital; and Ran Eliasaf, founder and managing partner, Northwind Group. The May 28 discussion was moderated by NJBIZ Editor Jeffrey Kanige.

Throughout the 90-minute discussion, Kanige and the panelists weaved through a wide range of critical issues and trends in the banking and finance sectors. Kanige drilled into questions surrounding interest rates and the effects of monetary policy.

“Rates are higher now than they were four years ago – but they are still not historically, outrageously high,” said Kanige. “People are trying to get used to a different world – or at least that’s what I’m hearing. Are you hearing the same things from the folks you work with – from clients, from customers – about interest rates and how is that affecting your business?”

“The market is coming out of a long period of low interest rates, and it needs to adjust to the new reality,” Eliasaf explained. “Initially, the predictions were that we’re going to see a faster reduction in rates. That’s not happening. You can see it in the curve right now. And what that means is that cap rates and valuations have to adjust – and they will. It already started happening on commercial real estate; definitely happened in office where we see now new valuations coming in much lower than they were three-four years ago. It’s going to happen also in multifamily – it has to. There has to be a correction.”

He said that a lot of the loans that were done in the last five to seven years that are coming up now to refinance are having some issues.

“We are seeing a lot of transactions that need more time to stabilize, and the equity needs to write a check to right-size the loan – and that’s happening,” said Eliasaf. “We’re still seeing a lot of loans that are being extended with current lenders – banks and non-banks alike, mortgage rates, etc. – that are giving more time. Some people like to call it ‘pretend and extend.’ It’s a reality. I think many loans are getting extended now with hopes for a better rate and a better environment in the future.”

Hall echoed that sentiment. “My colleague said, ‘extend and pretend.’ We’ve been hearing ‘survive till ’25,’” said Hall. “Many people are just not willing to take on a rate. Or even if the bank offers to have a floating rate and then it locks when you would draw down the capital. No one wants to lock at high rate. So, they’d like to extend the low rate they already had and try to ride out inflation.”

Could change be on the horizon?

The NJCC president and CEO noted that because of the pandemic there were not a lot of construction starts, and there was a lot of catching up to do as a result with respect to new supply that had not cycled through just yet.

“So, there’s just been a lot of stubbornness with inflation – because there’s just not a lot of new product there,” Hall explained. “That being said, I think we’re going to see that change in the coming 18 months. But it has just been a slow turn because of the slowdown in the natural progression of things during COVID. And now that the rates are so high, the people that would produce the supply are like, ‘hey, I want to kind of wait this out because I don’t want to get locked into a higher rate for the long-term – and then not be able to get out easily in the next couple of years when rates do come down.’”

Garcia joked that he did not have any rhymes about the trends like Eliasaf and Hall had – but did point out that the projected number of rate cuts from the Federal Reserve has dipped dramatically as the year has played out.

“At the beginning of this year, everyone was saying six rate cuts. And now, you’re hearing two rate cuts. And even Goldman Sachs today pushed out their first rate cut from July to September,” said Garcia. “As we get closer to July, they have to kick it down the road. For the folks on this webinar, I think we should all recognize that we’re going to be in a higher rate environment for longer. And then you just need to understand that and not just hope that rates are going to go down lower to where they were two years ago. So, then plan accordingly. At the end of the day, it’s all about strategic planning for your business – and hope’s not a strategy.”

Replay: Trends in Banking & Finance Panel Discussion

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Kanige turned the conversation to Melilli and asked what planning accordingly would look like and what can be done to navigate these conditions.

“Jeff, when you kicked off the question about where rates are and where they are historically – I’ve been kind of banging that drum for quite some time now,” said Melilli. “People are running around right now. Yeah, they’re up 500% or something like that the last two years. But, historically, they’re still pretty low. What we found was when the first rate hikes took place, a lot of people had sticker shock. They all kind of panicked and stopped.”

But since then, Melilli explained, a number of projects have moved forward — and the ones that did not often did not make sense anyway.

The digital transformation

From there, the conversation ticked through topics such as economic and geopolitical uncertainties, regulatory changes, liquidity, advice for businesses looking to start or expand as well as those that are distressed or in underserved areas, and sustainable investing.

Kanige then moved the discussion to technology and the digital transformation: how banks and other lenders are using technology and what we can expect going forward.

“Is technology and the proliferation of different kinds of technology – artificial intelligence and other sorts of things – likely to have any significant effect on access to capital and the availability of capital?” Kanige asked.

“Fintech obviously allows people who may, at one point, have been unbankable to get a debit card and begin to build a credit history and kind of build from there into conventional banking means,” said Hall. “It’s allowed anyone that’s in the financial engineering space to gather more information on particular clients faster – and process that information faster and more efficiently to personalized credit products to said client.”

Hall said that while there are many predictions about AI replacing jobs in banking, he referenced something that Garcia said during the discussion about character lending.

“There still has to be the human element to character assessment,” Hall said. “For as much as data is being transferred, gathered and processed faster, you’re still going to need someone that can sort of read between-the-lines and see whether or not this is a good character bet as it relates to a small business loan and/or real estate development loan.”

Melilli said banks are studying this topic intently, noting that many had their process accelerated because of the pandemic when they had no choice. “We saw a lot of companies come to banks, certainly ours, for ACH capabilities, fraud detection through bill-pay and things like that. And we only see that continuing,” said Melilli. “From an AI perspective, TD Bank has a little bit of a different approach than maybe some others. We don’t like to go out to the market and be the first. We kind of let JP Morgan Chase and Bank of America and those guys do that. And they figure out what works, what doesn’t work from a digital perspective. But then we will follow in and plug on things that work for our customers.”

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“Martin hit the nail on the head. I think banking, in general, has always been slow to adopt technology and new service channels – to some extent,” said Garcia. “I think the pandemic kind of changed that narrative a little bit as we had to crank out a bunch of PPP [Paycheck Protection Program] loans within days. So, we all started to get a little bit smarter about technology. I think it is a major initiative for most, if not all, financial institutions today.”

Garcia said his bank is trying to use technology to make banking easier for customers while they are busy running their business. “It’s that marriage between relationship which I talked about – but also getting tools in their hands to help them facilitate their day-to-day banking or financial transactions a little bit easier,” he said. “So that’s what we are really focusing on the technology side. And on the flip side, we’re actually using AI right now. We’re testing it out for some back-office operations. Some of the stuff that’s, quite frankly, not that much fun for employees to do – data mining and some of the mundane tasks for some of our folks. To take that out of their hands and get them into more of the creative or the analytical side of things that makes their career and their job a little bit more fulfilling.”

Advice for businesses: ‘Stay the course’

Following a discussion on capital markets and fertile areas of investment, Kanige took some questions from the audience before going around the horn once more to allow the panelists a chance for final thoughts.

“I think it’s going to be a very exciting time for commercial real estate and for the lending market,” said Eliasaf. “It’s going to be volatile. And I think we’re already seeing right now some of the winners and some of the losers. A lot of firms are focused on issues with their legacy portfolios – and it opens up the field for new players to come up. We’re going to see new private equity firms, investors emerge as the new leaders in the industry over the next two years. We’re already seeing large transactions, large buildings that are being traded right now at record low prices.”

I think it’s going to be a very exciting time for commercial real estate and for the lending market.
– Ran Eliasaf, Northwind Group

“I thought it was a really good discussion. I actually learned a little bit myself – so I thank you all for that,” said Garcia. “We just continue to do what we do – as a bank and as a financial institution. We’ll adapt as times change for better or for worse. I think everyone should just look at their own business the same way. Don’t panic, levelheaded, and stay the course. And we’ll be alright.”

“Thanks NJBIZ for hosting. Thanks to all my panelists for so much insight and thoughtful comments,” said Hall. “Sort of along the same lines – I think we can’t have a one-size-fits-all attitude about the state of the economy. Different sectors are going to do well. Other sectors may struggle for some time. But you have to remember – it’s all cyclical. It all will come back. So, stay the course small business owners and real estate developers. We need you.”

“My last thought is thanks, in general. We only make money if we are lending money,” said Melilli. “So, for every entrepreneur, please follow your dream and let’s get this done together.”