What’s be­hind the slow­down in CRE lend­ing ac­tiv­ity

Com­mer­cial real es­tate is their bread and but­ter, but many banks are scal­ing back in this vi­tal loan cat­e­gory. Here’s why.

National Mortgage News - - Contents - By Andy Peters NMN

Com­mer­cial real es­tate is banks’ bread and but­ter, but many lenders are pulling back in this vi­tal cat­e­gory as they con­tend with stiffer com­pe­ti­tion from non­banks, a surge in loan delin­quen­cies and broader eco­nomic forces, such as the in­crease of shared workspaces.

The rate of growth for CRE lend­ing has dropped to its low­est level in at least three years as banks have tapped the brakes in lend­ing to own­ers of both owner- oc­cu­pied and non- owner- oc­cu­pied com­mer­cial prop­er­ties, ac­cord­ing to FDIC call re­port data com­piled by BankRegData.

Robert Reilly, the chief fi­nan­cial of­fi­cer at the $ 368 bil­lion-as­set PNC Fi­nan­cial Ser­vices Group in Pitts­burgh, re­cently told in­vestors and an­a­lysts that deal vol­ume has slowed con­sid­er­ably in re­cent quar­ters.

“If you go back a year and a half or so, orig­i­na­tions are down maybe 30%,” Reilly said at in­vestor con­fer­ence hosted by Mor­gan Stan­ley in mid-June.

Justin Bakst, direc­tor of cap­i­tal mar­kets at the real es­tate data provider CoS­tar Group, said that deal vol­ume has tight­ened, in part, be­cause the U.S. econ­omy is in the late stages of its re­cov­ery and the pace is re­turn­ing to more typ­i­cal lev­els.

To­tal trans­ac­tion value for com­mer­cial real es­tate deals fell 6% last year, to $ 582 bil­lion, com­pared with the year prior, ac­cord­ing to CoS­tar.

“CRE trans­ac­tion vol­ume hit its peak in 2015 and it re­mained high in 2016,” Bakst said. ‘ We’re now com­ing down off those his­toric highs.”

As the pool of deals shrinks, banks are ad­ding fewer CRE cred­its to their books. To­tal com­mer­cial real es­tate loans rose 0.8% from the fourth quar­ter to the first quar­ter, to $1.4 tril­lion, ac­cord­ing to BankRegData. That com­pares to a 1.6% in­crease in the same pe­riod two years ear­lier.

At least some of the pull­back by banks is a re­sult of non­bank lenders, par­tic­u­larly pri­vate-eq­uity funds, swoop­ing in and steal­ing banks’ busi­ness, said Joe Walker, the head of CRE lend­ing at the $6.9 bil­lionas­set WSFS Fi­nan­cial in Wilm­ing­ton, Del.

“Pri­vate eq­uity will come in and do either the en­tire loan, or a por­tion of the loan and we will be the sub­or­di­nate lender,” Walker said. “The CRE loans we do are safer, but they’re smaller.”

From Dec. 31 to March 31, CRE loans at WSFS dropped 0.2% to $2.3 bil­lion. It’s still the largest cat­e­gory at WSFS, rep­re­sent­ing about 47% of its to­tal loan book.

Broader eco­nomic changes may also be con­tribut­ing to the de­cline in CRE loan growth rates. Shared-workspace com­pa­nies like WeWork and Re­gus have changed the busi­ness of man­ag­ing and devel­op­ing of­fice build­ings, said Gary Mag­nu­son, the head of com­mer­cial real es­tate fi­nance at the $ 158 bil­lion- as­set Cit­i­zens Fi­nan­cial Group in Prov­i­dence, R. I. The re­sult is that over­all de­mand for of­fice space could be shrink­ing.

“Ten­ants are us­ing less space,” he said. “They want more flex­i­ble space. The trend is to­ward fewer of­fices.”

Lenders may also be spooked by a re­cent uptick in early-stage delin­quen­cies, said Doug Ressler, the direc­tor of busi­ness in­tel­li­gence at the real es­tate data provider Yardi-Ma­trix. CRE loans that are be­tween 30 and 89 days late rose 26% to $ 4.5 bil­lion from the fourth quar­ter to the first quar­ter.

As more loans be­come past- due, it’s di­min­ish­ing banks’ ap­petite for risk, Ressler said.

“There’s an aw­ful lot of wait- and-see at­ti­tude that’s play­ing out here,” he said.

That at­ti­tude ap­pears to be the new nor­mal when it comes to bank lend­ing for com­mer­cial real es­tate.

“We love the busi­ness,” Wells Fargo CEO Tim Sloan said on May 31 at an in­vestor con­fer­ence. “But … you need to be care­ful out there.”

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