When seeking construction financing for major real estate projects, developers almost always turn to big banks. Large institutional capital has been one of the biggest lenders to commercial development projects over the past decades. But over the last ten years, Bank OZK, a small bank from Arkansas, has grown to become one of the most powerful financiers of large real estate projects in the U.S. Today, the real estate industry continues to navigate the fallout from the Fed’s decision to raise interest rates to fight inflation, the regional bank has managed to stay resilient and post solid lending numbers.
Bank OZK has humble roots. It began in 1903 in the small town of Jasper, Arkansas, and expanded to a second location in Ozark, Arkansas, by 1937. The first big turning point for the bank came in 1979 when attorney George Gleason acquired the bank at a time when it had just $28 in assets and rebranded it as Bank of the Ozarks. By 1994, Bank of the Ozarks had five locations and began to ramp up its expansion by moving its headquarters to Little Rock in 1995. Fast forward to the early 2000s when leadership decided to jump into the commercial real estate arena and formed Real Estate Specialities Group, a division of the bank focusing on high-quality construction loans for large marquee real estate projects.
After blockbuster years financing some of the largest real estate projects in the country, including Manhattan skyscrapers and luxury condo buildings in Miami, Bank OZK had become one of the most well-known names in the industry. By 2018, company leadership agreed to rebrand the bank’s name from Bank of the Ozarks to Bank OZK. The same year, the bank completed a deal to finance an ultra-luxury condo project in Sunny Isles Beach, Florida, with a $558 million construction loan. In 2019, the bank inked one of its biggest deals. It provided a $664 million construction loan to Jeff Vinik and Bill Gates’s Cascade Investment LLC for the duo’s sprawling mixed-use project Water Street Tampa in downtown Tampa, Florida. Today, Bank OZK has more than 240 offices in eight states and a total of $32.77 billion in assets as of last September. The latest financial reports shed light on how the bank is managing at a time when construction lending has practically frozen.
In its third-quarter earnings report, the bank revealed it had achieved record quarterly income, with its net income up 32.3 percent from the third quarter of 2022. One of the bank’s most recent loans was a $259 million construction loan Bank OZK provided to Fortune International Group and Oak Capital for its planned Ritz-Carlton Residences project in Pompano Beach, Florida. The loan is the largest-ever residential construction loan for the South Florida town, which has recently become a magnet for luxury condo towers. Recently, Bank OZK has put its focus on the sectors that were not as hard hit as the office during the last few years. “Multifamily and industrial has been, for the most part, the big movers,” said Bank OZK President Brannon Hamblen in the company’s third quarter 2023 earnings call. “We’ve had some good mixed-use in there as well. But those are where we’re seeing a lot of opportunities.”
Leaders at the bank do not seem to be too worried about the rise in defaults in the commercial real estate market, especially those in the office sector, though they acknowledge that record-high interest rates have led to a slower repayment volume. “We’re thrilled to death to have loans stay on the books longer, and a lot of times sponsors are quick to exit our loan to go to a cheaper permanent loan solution,” said Bank OZK CEO George Gleason in the 3Q call. “Sponsors are being very reticent about trying to figure out where their best exit is refinance-wise. So that’s keeping the loans on our books and our higher-yield construction loans longer. Our leverage points are low. So we’re very happy to have those loans on the books for an extended period of time.”
The commercial real estate market, especially the office sector, has been one of the industries that has felt the most pain from the pandemic and the ensuing downturn. Banks that do a lot of lending to commercial real estate developers and owners have also suffered—especially smaller and more regional institutions. Silicon Valley Bank, known for partnering with startups and lending to VC firms, collapsed in March 2023. The bank had some real estate exposure: 15 percent of SVB’s loans were secured by residential mortgages and commercial real estate. Just two days after SVB’s failure, Signature Bank, one of the biggest multifamily lenders in New York City, was shut down by regulators.
The prospect of banks getting hit hard and potentially shuttering as a result of the slowdown in the market has been much discussed in the industry after Silicon Valley Bank’s demise. But upon review, mismanagement was likely the primary cause of the institution’s downfall, not market forces. Bank OZK’ is a testament to that. In 2022, the bank came close to doubling its lending volume in 2021, reaching $13.82 in origination volume. Though bank leaders acknowledged that there was less volume in 2023 due to continued interest rate hikes, which also slowed down the speed of getting deals done, they also were confident that 2023 would be another healthy year, pointing to the quality and strength of the sponsors they’ve worked with and their consistency in the market. “Discipline is key,” Hamblen said last fall. “The bank historically has averaged roughly a third of the industry’s loss rate and, year in and year out, outperforms the industry.”
Despite the turmoil the commercial real estate market has experienced in recent years, Bank OZK has managed to remain on solid footing. The bank is still making high-profile construction loan deals. Although leaders have acknowledged the volume and speed to close deals are slower at the moment, they have stayed positive about the future, attributing their success to the caliber of their sponsors and their longtime foothold in the market. We will likely continue to see the bank make more blockbuster financing deals in the future, especially given the Federal Reserve has hinted there could be multiple rate cuts this year, a move that will undoubtedly get more developers off the sidelines.