John Petrovski once heated up fuel oil to 950 degrees as a researcher in the energy industry. Now he's keeping an eye on the temperature of commercial real estate markets.
Mr. Petrovski, 58, recently was promoted to managing director and head of commercial real estate lending in the U.S. for Chicago-based BMO Harris Bank N.A. He moved into the role from the bank's chief operating officer position for commercial real estate.
In his new role, Mr. Petrovski oversees a team of 120 people and is aiming to boost new loan origination by 20 percent over the next year at the bank, a unit of Toronto-based BMO Financial Group. The bank’s commercial real estate portfolio in the U.S. was approximately $6.3 billion in the first quarter, according to a bank spokesman.
BMO has been an active financier during the local real estate recovery. It served as a lead lender for the New City apartment-retail development on the North Side and joined other banks in financing construction of the Maxwell, a South Loop shopping center, and redevelopment of the Lakeshore Athletic Club into luxury apartments.
Now, Mr. Petrovski must compete to find deals during what he calls the “middle innings” of the real estate cycle in the Chicago area and other markets where BMO is active.
“Generally, coming out of the downturn, there's pent-up demand for prudent new supply — pre-leased office, pre-leased retail, some new apartments,” he said. “So I'd like to continue to do more of that.”
Retail and office projects are likely just in the fourth inning of the cycle, he added, using the baseball metaphor, but apartments are further along, in the fifth or sixth.
“We're probably going to do a bit more slower volume of new apartments as we kind of digest the ones we've done and be a little bit more selective going forward,” Mr. Petrovski said.
A Chicago native, Mr. Petrovski has a bachelor's of science degree in chemical engineering from the University of Illinois at Urbana-Champaign. After college, he spent two years as researcher for Amoco Oil Research in Naperville before going back to school to study law at the University of Michigan, earning a degree from the school.
Mr. Petrovski then returned to Chicago, where he worked for the predecessor firm of what's now Katten Muchin Rosenman LLP. He later took legal and executive roles with lender Heller Financial during a 14-year stint with the firm, and served as a group president at Merrill Lynch Capital in Chicago for six years, overseeing $5 billion in commercial real estate loans and 80 employees.
He then worked as president of Picerne Capital and spent two years at the Federal Deposit Insurance Corp., focusing on bank loss-share monitoring and other projects. In April 2012, he joined BMO Harris as its chief operating officer. Mr. Petrovski takes over his new position from Dan Hampton, who is now based in Indianapolis as managing director for commercial real estate sales.
In a recent interview, Mr. Petrovski discussed real estate lending in the current market. Here are excerpts from that discussion:
Crain's: You have lent into the apartment market downtown — I'm thinking of the Lakeshore Athletic Club loan, for example. Are you worried about an oversupply or even a glut in the Chicago market?
Mr. Petrovski: Worried would be strong, but I would say we're mindful of it. So we watch new supply rigorously and we watch supply/demand and lease-up, and watch for concessions to creep in. But overall I would say that the country has good demand for new apartment supply. There is the demand. The local question is: Is there too much high-end coming on all at once? And we think that could happen, but generally I think you'll see concessions creep in, you'll see the pipeline get pinched down.
How does Chicago's commercial real estate market compare to other cities where BMO Harris is lending and doing real estate deals?
We look at market size and demographics and growth all the time. We look at supply and demand all the time. The good news about some of the smaller secondary markets is they're not being overbuilt. On the other hand, they don't have the growth that would kind of absorb new product as it comes on. Chicago is a large market, and it's got a wealthier population than a lot of cities. So there is the demand for high-end rental, for high-end shopping. There is demand for new office space and tenants that want to rent in new office buildings.
Are you seeing lending requirements loosen up as the market improves vs., say, two or three years ago?
We've seen a significant change in the capital markets approach to real estate in the last three years. Whereas three years ago there wasn't as much activity and lending volumes were still low, today, lending volumes and transaction values and transaction activity is back to '05-'06 values. We're not yet back at the '07 frothiness but we're at a healthy volume. We see a healthy amount of competition from other lenders and sometimes that encourages us to increase our advance rates or compete more on spread.
After a long career in the private sector, you spent almost two years working for the FDIC right after the biggest real estate downturn in decades. What did you take away from that experience with regard to real estate lending?
I've been on both sides now, in the bank and in the government, and I'd say what's come out of my experience is a renewed appreciation for what I call loan structure. And by loan structure what I mean is, (Do) you have an appropriate amount of equity in the deal? Do you have loan covenants, that if the property performance starts slide sideways can you trap cash to protect the property? I think appropriate advance rate, appropriate structure and appropriate monitoring are all things the FDIC wants to see. Likewise it's what the bank wants to see.
Mr. Petrovski: Worried would be strong, but I would say we're mindful of it. So we watch new supply rigorously and we watch supply/demand and lease-up, and watch for concessions to creep in. But overall I would say that the country has good demand for new apartment supply. There is the demand. The local question is: Is there too much high-end coming on all at once? And we think that could happen, but generally I think you'll see concessions creep in, you'll see the pipeline get pinched down.
How does Chicago's commercial real estate market compare to other cities where BMO Harris is lending and doing real estate deals?
We look at market size and demographics and growth all the time. We look at supply and demand all the time. The good news about some of the smaller secondary markets is they're not being overbuilt. On the other hand, they don't have the growth that would kind of absorb new product as it comes on. Chicago is a large market, and it's got a wealthier population than a lot of cities. So there is the demand for high-end rental, for high-end shopping. There is demand for new office space and tenants that want to rent in new office buildings.
Are you seeing lending requirements loosen up as the market improves vs., say, two or three years ago?
We've seen a significant change in the capital markets approach to real estate in the last three years. Whereas three years ago there wasn't as much activity and lending volumes were still low, today, lending volumes and transaction values and transaction activity is back to '05-'06 values. We're not yet back at the '07 frothiness but we're at a healthy volume. We see a healthy amount of competition from other lenders and sometimes that encourages us to increase our advance rates or compete more on spread.
After a long career in the private sector, you spent almost two years working for the FDIC right after the biggest real estate downturn in decades. What did you take away from that experience with regard to real estate lending?
I've been on both sides now, in the bank and in the government, and I'd say what's come out of my experience is a renewed appreciation for what I call loan structure. And by loan structure what I mean is, (Do) you have an appropriate amount of equity in the deal? Do you have loan covenants, that if the property performance starts slide sideways can you trap cash to protect the property? I think appropriate advance rate, appropriate structure and appropriate monitoring are all things the FDIC wants to see. Likewise it's what the bank wants to see.
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