February 23, 2018
By KC Conway, CCIM Institute Chief Economist
The headline suggests banks are pulling back on CRE lending – and maybe hinting a correlation to higher risk for CRE. I proffer a different perspective.
First, banks are seeing a healthy perm debt market take out their maturing construction loans. That is a good and healthy thing. We need perm markets healthy so construction loans pay off and don’t back up in the banks. Thank you recovered CMBS market and CREFC leadership.
Second, banks are loading up in CRE lending in other ways under the regulators radar – and that is not a good thing. How so? Lending activity to homebuilders via entity financing vehicles or C&I bucket masks a ramp up in lending to public and strong regional builders. Housing starts are rising and back over 1.3 million units this morning. And some regional banks are ramping up lending to senior housing areas calling it RETAC (Real Estate Taken As An Abundance of Caution) and masking a ton of CRE lending. Don’t be fooled, banks are making more real estate loans, but in ways that mask it from being counted as CRE. Why? HVCRE capital penalties are still a factor and banks are trying to avoid tripping any CRE concentration wires.
Banks are not pulling back from CRE lending, and are in fact poised to pounce again in 2018 as construction loans pay off. And get ready for another surge in multifamily lending thanks to easy money from Freddie, Fannie and HUD – especially in senior housing. The risk to banks is putting that money to work in a rising rate environment with elevated CRE values and rising construction costs. Can NOIs improve to keep pace with higher construction costs and higher Cap Rates a year from now? Now is the point in the cycle banks are most likely to make their next batch of problem loans. All need to dust off forgotten tools like Band of Investment to derive a Cap Rate to understand the impacts on values.