By Matt Grossman
When investors list the up-and-coming real estate markets they’re most amped up about, the readiest answers—places like Miami, Nashville, Atlanta and the Carolinas—tend to have three things in common: sunny weather, low tax bills, and a latitude south of the Mason-Dixon line. For one U.S. commercial real estate bank with one of the boldest success stories of the last decade, a fourth factor unites those markets as well: They’re all right in its backyard.
Ten years ago, Atlanta-based SunTrust Bank, whose history dates back to 1891, had barely any commercial real estate lending book to speak of. But under the leadership of Kathy Farrell, who’s been in charge of commercial real estate lending since 2016, the bank’s property debt business has been on a tear. Lending volumes have approached $10 billion in recent years, and the bank’s real estate balance sheet is almost twice that figure. Meanwhile, SunTrust’s upcoming merger with BB&T, based in North Carolina, is poised to position Farrell’s team as part of what should easily become the Southeast’s most powerful native financial institution. The deal will create America’s eighth-largest bank overall, according to Standard and Poor’s, immediately behind U.S. Bank and Morgan Stanley on the list.
Because it started from scratch just a decade ago, SunTrust has never been weighed down by floundering loans on suburban shopping malls—the kinds of deals that have dinged the balance sheets of many of Farrell’s august competitors. Still, Farrell’s been a fearless retail lender in her own right, delivering financings to some of the Southeast’s most creative and high- profile mixed-use retail developments. Eager to hear more about sites like the Atlanta Braves’ new ground-up retail district, The Battery, as well as urban reclamation projects that are changing the face of America’s ninth-biggest metropolitan area, Commercial Observer flew down to the Peach State last week for a long-overdue chat with an inimitable leader on the Sun Belt’s real estate finance scene.
Commercial Observer: SunTrust isn’t a name we’ve heard around New York City all that much, but your group did $8.5 billion in originations last year. How long has SunTrust been in this line of work?
Kathy Farrell: A little more than 10 years ago, we were largely a single- family residential lender in our footprint, which is Baltimore down to Miami. Then the downturn came, and that didn’t really serve us well, obviously. So, we reinvented ourselves after we worked out most of our portfolio. We’ve become much more of a traditional commercial real estate lender. We’re focused on working with strong, seasoned private developers across our footprint. We’ve also expanded into Boston. And we have people on the ground in each of our major markets: Nashville, Charlotte, [N.C.], Washington, D.C., Miami and down here in Atlanta.
SunTrust is a major player in the Southeast on bread-and-butter office and industrial deals, but what else falls within the scope of your lending?
We have a group that focuses on just real estate investment trusts. It traditionally was an investment REIT platform, but it has since grown and expanded to cover the broad sector: newer REITs, some that are approaching investment grade and others [that] are investment grade. Then we have another group that focuses on private-equity groups and funds like Blackstone and Carlyle. If you’re following real estate, you know that that’s where all the equity is being raised today. And we have another group that is very, very active in tax-credit financing, low-income housing tax credit deals.
And SunTrust does multifamily business through agency deals as well, right?
We do, through the acquisition of Pillar Financial and Cohen Financial, which were previously owned by Guggenheim. We acquired them in 2016, and that gave us our Fannie [Mae], Freddie [Mac] and HUD [Department of Housing and Urban Development] licenses. All together, our portfolio is just shy of $20 billion in total exposure, with roughly half of our business outside our footprint and half inside. So, it’s very much a national platform.
As competitive as CRE lending has been in recent years, how in the world were you able to build a $20 billion balance sheet from scratch in a decade?
We had long-established relationships with real estate owners, operators and developers in our local market. So, I think, coming out of the downturn, it was easy to call on those relationships and say, hey, look, we’re a totally different business today. We have capital, and we want to be here to help you grow your business coming out of the downturn too. Capital was scarcer then, in 2012 and 2013, so I think we really leaned in on those long relationships and made some strategic hiring choices. That’s really what enabled our business to grow.
Meanwhile, SunTrust’s backyard has been one of the most dynamic regions of the U.S., considering cities like Atlanta, Nashville, Austin, and Miami. What, in your view, is driving businesses’ desire to have a presence down here?
Well, I’m a transplant here myself, actually [from Fairfield, Conn.]. It’s the reasonable cost of living, the great weather, the favorable business environment. And layer in the tax reform. You started to see several years ago that companies were leaving the Northeast, leaving the Midwest, relocating their corporate headquarters into the Sun Belt market. It just continues: Look at Amazon, bringing 5,000 jobs to Nashville. At [a conference I attended], everyone was saying, gosh, as recently as seven years ago, they all still thought of Nashville as hee-haw country. Now, it’s like très chic.
There’s certainly no shortage of magnets.
The colleges and universities are a big draw. You’ve got Duke and the University of North Carolina, and you’ve got Georgia Tech here [in Atlanta]. And Vanderbilt is a really strong undergraduate program. So, there’s a talent pool to draw from as well.
As a northerner, one thing that strikes me about Atlanta, for example, is that it’s much less walkable than places like New York City or Boston or Philadelphia. What’s your take on how urban retail is doing here?
Mixed-use, urban-core properties that include retail is something we’re really good at analyzing and figuring out with clients. You might be familiar with The Battery, the big new mixed-use development adjacent to the Atlanta Braves’ new stadium. [About ten miles from Downtown Atlanta, the development combines the baseball park with a big shopping center, a big regional office for Comcast NBCUniversal and an Omni Hotel.] We have a sports and entertainment [lending team] that financed the stadium, and we worked on all the developments surrounding the stadium.
It’s an interesting project. The Braves picked up and moved there in 2017 from Turner Field, the former 1996 summer Olympics venue, to a suburban complex where they could develop retail and offices alongside the baseball facility. Is that kind of mixed-use project especially appealing to you?
Definitely. We also worked on Ponce City Market here in Atlanta, a food hall and retail development. It’s in a converted Sears, Roebuck & Company building in the Old Fourth Ward neighborhood, and we were the capital for the conversion of the Sears building into the mixed-use project that it is today, for Jamestown. Then, if you look at The Wharf project up in Washington, D.C., on the Potomac River, that’s another project we were involved in. We were a lead bank there, doing the financing for the developer, PN Hoffman. [The waterfront retail-and-entertainment development, which also features apartments, is akin to New York City’s Seaport District.] Then, there’s Carolina Square, in Chapel Hill, North Carolina, a multifamily building in the center of town we financed that also has 42,000 square feet of retail.
Have projects like that pretty much supplanted your interest in lending on traditional malls, or are you still doing some of those deals as well? Yesterday morning I was at Lenox Square, the big mall in Atlanta’s Buckhead neighborhood, and it was hopping even on a weekday.
Well, that’s an urban core mall: really, really well located. It has gold- standard sponsorship, with Simon Property Group. You’re seeing Simon investing in those models, and they’re constantly evolving. They’re looking to see what kind of densification they can achieve, so that they can add multifamily and office and build that around their retail. Look, not all malls in the Southeast are performing that well.
I gather mall lending is not an area you’re very enthusiastic about?
We’re not in the mall business. I think we’ve got a bit of exposure to two currently, but one exposure is going to go away, and the remaining exposure is so small that you wouldn’t notice it in our overall portfolio. We do have exposure to mall REITs, and we’re comfortable with that exposure, because again, it’s theSimons and Taubman Centers—the high-end mall operators who are reinvesting in their properties.
Do you see any bright spots outside the urban core at all?
Our suburban retail exposure is predominantly in grocery-anchored retail. Think about our footprint market in the Southeast, and the tremendous amount of growth that’s happening. The housing comes first, and then people need to eat, right? So the grocery comes next. The grocery anchor right now continues to be a really strong model. We have financed a fair amount of that largely in our footprint.
Going back to some of the interesting urban retail you’ve worked on— you mentioned The Battery, and Ponce City—what’s the common thread that makes projects like those so appealing?
It’s the whole live-work-play thing; the walkability, the access to public transportation. The BeltLine is a fantastic example. [Like New York City’s High Line, it’s a project to create miles of park and commercial space along former freight tracks.] It’s really a much larger mixed-use project, because there’s no one developer. There’s going to be a whole number of developers coming together.
The BeltLine is still in its very early stages, though. Why has it taken so long here to see that kind of urban, walkable mindset for commercial projects?
Atlanta is not a city that was built before cars. Well, it was, but then the Civil War came and burned it all down. By the time it was well into being redeveloped, cars were becoming a consideration. So it doesn’t have that same walkability as some of the older cities like Boston and New York. To create something like the BeltLine and provide that walkability for people— that’s exciting.
How did SunTrust become so involved at The Battery? Obviously the Braves’ new stadium is something you’re proud of, because the bank has the naming rights to SunTrust Park.
We have a very long-standing relationship with the Braves. You know, we’re two Atlanta institutions. The Braves owned all of the surrounding land, and they really wanted to develop it, to create a big entertainment venue and to get people to come into the stadium on a regular basis. The old stadium, Turner Field, was a standalone, all by itself. You went to a game and then you drove away. They wanted to create an environment where there’d be things to do before and after the game. The Braves brought in various partners that had expertise in office, retail, multifamily and hospitality, and the more time that we spent with them, the more we understood what they wanted to accomplish. It was pretty exciting to be part of it.
How did you get started in real estate? Were you set on this industry from the start?
I’m from Connecticut, near Fairfield, and I went to college in Massachusetts, at Holy Cross. Like most of the graduates, I went to Boston afterwards. Eventually, I landed a job in corporate lending at a bank that got acquired by Fleet Bank. I was all excited because I was this junior loan officer doing all this cool corporate stuff—kind of neat. But then I got a call that I was going to be moved over to real estate, and you know, I didn’t know anything about real estate. But real estate was the reason for the downturn in the early 1990s in Boston, and they said that they needed credit people who could analyze tenants.
So that’s how you got your feet wet.
They gave me a handful of clients, and my first project was construction debt for a grocery-anchored retail center in Auburn, [Mass.], which is right next to Holy Cross. I went out every month to all the construction meetings and watched them build this project—it was a Stop-and-Shop-anchored center. And I saw it come to life, and people come to shop there—it was my first taste of building a community. I’m like, “This is awesome! I’m hooked.” That was probably 1996 or so, and I’ve made the decision to stay.
How did that path eventually bring you to the top CRE job at SunTrust?
Eventually I found my way to National City Bank in Cleveland, where I started up a real estate capital markets platform. Then they announced that PNC was buying us, and they said to me, ‘Okay, you can work on integration.’ So I’ve done integration—we closed that merger in 10 weeks. Then in 2013, I got a call from SunTrust to come down. I’d stayed in touch with some people here that I’d worked with at Fleet. We all talked, and they said that they wanted to build out the business. They thought that, coming from PNC, I could bring a bigger-bank perspective. So I joined here in 2013 and had a variety of jobs. You take a risk sometimes in your career, right? A little bit of it is luck. I got here, and two senior people retired, so it created an opportunity. I raised my hand that I was interested [in leading CRE lending], and I got the job.
Women are still under-represented in CRE leadership roles. What’s your perspective on how the industry is doing on that front?
I’m actually the enterprise chairperson for our women’s network here at SunTrust. I feel, in that position, that I have an opportunity to help continue to raise awareness. Across the board, we need to be deliberate and intentional, and give women the opportunity. It really comes down to our hiring practices and our promotion practices. The industry organizations, like MBA and CREFC, all have been working hard at creating opportunities for women, so I think that’s really, really good. But you know—and it’s the same for minorities as well—at some point, you have to take a chance on an individual. Still, I’m really happy with what I’m seeing.
You’ve been doing this since the 1990s. How is underwriting holding up today? Are you seeing anything out there that concerns you?
By and large, I would say the fundamentals are strong. As it stands today, as an industry, real estate’s not overleveraged. Certainly, the banks have been very disciplined and in sticking to leverage levels in the 60 percent to 65 percent range. We banks have a lot of structure in place around what we’re willing to do.
I think I hear a ‘but’ coming.
Where I think you’re starting to see some erosion is the non-bank competition, which is not regulated, and which is newer to the market. Those lenders have raised billions of dollars of capital and it has to be put to work. They’re jumping in and starting to do more construction lending and bridge lending, stuff that’s on the riskier end of the spectrum. The leverage levels that we’re seeing are levels that we can’t and won’t compete with, right? I think that’s cause for concern. There was a big mixed-use project planned for a plot near Hartsfield-Jackson Atlanta International Airport, with a strong sponsor. They received multiple term sheets, and it’s going the way of a debt fund. I think that’s really disappointing for someone like SunTrust, the hometown bank. We would have loved to finance that. Colony Squares is another great example. That’s a project in Midtown Atlanta where we provided the capital for a repositioning, and then were taken out by Blackstone.
I don’t envy you for trying to compete against Blackstone and Starwood Property Trust and the like.
Gosh, I don’t blame the sponsors for the great terms they get [from debt funds]. I think all the banks are struggling with that.
I’m expecting a ‘no comment’ here, but can you give me just one word to describe your thoughts on the upcoming BB&T merger?
Excited. When you think about the capabilities that we will have as a large institution, we’re really excited.
With Atlanta getting more and more national attention as a real estate market, what was your personal experience of moving here from the Northeast a few years ago?
If you’re from the north, and you have kids, every fall you go through that ritual of, all right, let’s see if the snow pants still fit, let’s see if we have enough turtlenecks, and all of this stuff. We don’t have to do that anymore! You can make it through the winter here with a fleece jacket—so easy. In Cleveland, when my kids were six and seven, I’d drop them off in the morning for swim practice and they’d come out with their hair frozen like icicles.
Today, it’s in the 50s in New York City, and 86 degrees outside down here.
I don’t think you’ll see us leaving Atlanta. We really love it here.