Could the CRE lending surge be dwindling?

Could the commercial real estate lending surge be dwindling? Analysts and community bankers weigh in on the prospects for CRE lending in the medium term.

By Cheryl Winokur Munk

ver the past five years, community banks have celebrated an industrywide surge in commercial real estate (CRE) lending that has given earnings a substantial lift. But some industry participants are wondering if the party could soon be coming to an end.

According to the Federal Reserve’s Q2 2017 survey of loan officers, lending standards for all major categories of commercial real estate lending have tightened, and there has been a drop in demand for certain types of CRE loans. Notably, the report found that a “modest net fraction of banks reported weaker demand for construction and land development loans and loans secured by multifamily residential properties, while demand for nonfarm nonresidential loans remained basically unchanged on net.”

It’s not all doom and gloom, though. Industry watchers point out that the Fed’s survey wasn’t as downtrodden as it could have been. And many community bankers remain upbeat about the long-term prospects of CRE. The data also paint a rosier picture than the second-quarter survey suggests.

“It’s really a mixed bag,” says Christopher Marinac, director of research at FIG Partners LLC, an Atlanta-based advisory firm for community banks and their investors. “It’s not all roses; it’s not all terrible. I think it’s in between.”

Temperature check

According to FIG Partners research on banks with $350 million or more in assets, CRE represented 14.5 percent of all bank loans as of June 30, accounting for 25 percent of the growth in bank loans over the prior 12 months. “CRE is certainly growing faster than the total pool of loans for the industry,” Marinac says.

After weakening in the wake of the Great Recession, the total volume of CRE loans outstanding has bounced back in recent years to greater than pre-recession levels, buoyed in part by a long-standing low-interest-rate environment and strong demand for US real estate by foreign investors, according to an August economic brief from the Federal Reserve Bank of Richmond. Continued growth in multifamily housing has also contributed to the CRE boom, the report notes.

Now, there is an increasing sense among some industry participants that the surge in CRE lending may be coming to an end. Rising interest rates and a feeling that the most creditworthy buyers may be nearing their limits have heightened these concerns. Regulators, too, are paying close attention to the risks; they have repeatedly made clear that they will watch banks with high CRE concentrations more closely.

Proceeding with caution

While some community banks say they haven’t changed their lending guidelines, others are becoming more circumspect. Having come off years of robust lending, some banks are being choosier about the loans they extend. “They don’t want to see their margins compress any more than they already have,” Marinac says.

Within the past 12 months, Southern Community Bank, a $255 million-asset bank in Tullahoma, Tenn., has begun experiencing a slight slowdown in commercial real estate lending. Bill Yoder, the bank’s president and CEO, attributes much of the slowdown to the end of a favorable economic cycle.

Southern Community Bank still sees plenty of interest in the CRE market. The trouble is, these new investors don’t have the same credentials as past applicants; they have tighter cash flows and lower liquid net worth, for instance. “I think a lot of people have seen other people be successful at it, and they are trying to get on the bandwagon,” Yoder says. “They’re coming late to the game, you might say.”

“CRE is certainly growing faster than the total pool of loans for the industry.”
—Christopher Marinac, FIG Partners LLC

Clint G. Morton, senior vice president and senior lender at Farmers & Merchants Bank, a $140 million-asset community bank in Miamisburg, Ohio, has also noticed a slight drop in his bank’s CRE lending pipeline over the summer. “It’s hard to pinpoint, but I think it’s potentially a blend” of things, he says, citing a normal summer slowdown, as well as political apprehensions about the stock market’s potential to cool after a long upward run.

He’s not concerned, however, about a major pullback. “We’re not hearing from our business owners and investors of any grave concerns or fears,” he says. “It’s probably just more of a ‘step back and pause, and watch and see what happens’ [approach]. I think they’re maybe just taking more of a conservative approach.

Through the first six months of 2017, Bay Bank, a $646 million-asset community bank in Columbia, Md., has seen steady demand for commercial real estate loan requests. Even so, Jeff Plank, its commercial real estate relationship manager, says clients tell him it is harder to find deals. “I think this could be a function of increased competition for quality assets in good submarkets,” he says. “I think it could also be a function of a lack of available inventory, as owners and developers look to hold assets.”

Based on industry data and conversations with other bankers, Mac Wilcox, president and CEO of $265 million-asset Savoy Bank, based in Manhattan, says banks are generally tightening up on loans with a construction or material renovation component because of the additional risks involved. These risks are associated with mounting supply coupled with the potential for further interest-rate hikes, he says.

The loan environment also varies in different markets. Local demand is still strong in the south Florida market where TotalBank, a $3 billion-asset bank in Miami, does most of its business. Jay Pelham, president of TotalBank, says his bank is on track to have its strongest year in terms of overall loan production, with a significant number of new real estate deals pending. Commercial real estate lending has typically accounted for almost half of the bank’s overall production, he adds. TotalBank has strong expertise in multifamily lending, and Pelham predicts that this will continue to be a strong sector because of its location. “All of the Miami business and community leaders that I encounter feel optimistic about continued growth,” he says.

Profiting from pullbacks
Though regulators have recently taken a harder line on banks with high concentrations of CRE loans in order to limit potential issues, it can be an advantage to those community banks that continue to offer them. Select Bank in Forest, Va., is benefiting from the fact that large banks in its market are limiting their exposure to CRE loans. The $195 million-asset bank has noticed that a large part of the new CRE business is coming from clients of large national and regional banks—business it is thrilled to take on.

“There are good clients, with good credit metrics,” says J. Michael Thomas, Select Bank’s CEO. “We’re happy to bank those types of customers.”

Looking ahead, cautious optimism seems to be the prevailing mood among community bankers surrounding CRE loans, particularly in major cities where the property markets have held up reasonably well. While there has been a decrease in commercial real estate sales activity and leasing, significant refinancing activity has balanced things out, says Ed Lombardo, a commercial real estate loan officer at Quontic Bank, a $500 million-asset community bank in New York City. Lombardo adds that several economic factors could affect refinancing activity, including potential tax reforms, interest-rate hikes and general economic growth.


Cheryl Winokur Munk is a writer in New Jersey.

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