As robust as the overall CRE lending picture might be on the surface, banks are being more cautious.
There is nothing ambiguous about CBRE’s recently released report, “Commercial Real Estate Lending Market Remains Robust.” According to CBRE’s Lending Momentum Index, an index that tracks the pace of U.S. commercial loan closings, Q2 2018 numbers have kept pace with those reported in the first quarter. CBRE also indicated that banks accounted for almost half of the non-agency lending volume that closed during the second quarter.
Amid all the good news, the report also said that, “compared to a year ago, June (2018) lending was down by 10.6%.” This decrease shouldn’t come as a surprise, the Mortgage Bankers Association noted that “2017 was the strongest year on record for commercial and multifamily real estate finance.” Continuation on this momentum carrying into and through 2018 was uncertain because of various “headwinds and tailwinds.” These headwinds range from increasing interest rates, to decreasing NOIs and property value growth. Also decreasing? Property sales.
These factors, and other fundamentals, are putting pressure on bank-supported CRE loans, leading American Bankers to say: “many lenders are pulling back in this vital category as they contend with stiffer competition from non-banks, a surge in loan delinquencies and broader economic forces . . .”
Yet, on the other side of the debt information coin, an ABA Banking Journal survey found that banks are increasing concentrations in commercial real estate lending, particularly construction lending. Nearly one-fourth of those surveyed indicated they have exceeded their capital allocation for construction loans.
So, let’s cut through the contradictory information and focus on some facts.
- Deal volume is tightening. The economy has been in a long recovery period, which is in its last stages. Not as much property is changing hands, meaning fewer loans are being issued.
- Banks are pulling back on lending, and have been, for a while. The nation’s 25 largest banks are reducing their commercial real estate exposure, due to softening loan demand and more competitive deal pricing and structures.
- Debt availability for net lease properties remains unchanged. In a 2018 survey conducted by the National Real Estate Investor, 46% of those questioned indicated that debt availability in 2018 was unchanged from 2017, while 21% indicated debt was more widely available (up from 19%, in 2017).
- The yield curve is flattening. Whether this automatically means a downturn remains to be seen. Morningstar put it succinctly, saying that “a flattening yield curve indicates that many investors believe we are headed toward recession,” with the trend impacting “lenders’ profits and stability and their willingness to lend.”
The takeaway here is that, as robust as the overall CRE lending picture might be on the surface, banks are being more cautious. While debt financing is far from drying up, these lending institutions are focused on deals that make sense, and carry less risk.