The American Bankers Association (ABA) completed its first annual Commercial
Real Estate Lending Survey on March 21st, 2016. Of the surveyed financial
organizations, 70% were commercial banks, and 23% were savings & loans,
with 60% of these banks holding assets of $1 billion or less. The survey
primarily accounts for the end of the year results.
According to the survey, 82% of banks are preparing to strengthen their
capital positions into commercial real estate. To help drive future portfolio
growth, the banks have recognized the widespread need for Commercial Real
Estate (CRE) loans and are planning to invest more capital into business
financing and construction loans. The report showed that nine percent
of the banks have placed over 300% of their capital concentration to CRE
lending. Another 19% of those surveyed have devoted over 100% of their
capital expenditures into construction lending. In regards to CRE loans,
the study considers retail, multifamily, and office lending to be the
most prevalent categories involved.
Robert Davis is the ABA’s executive vice president of mortgage markets,
financial management, and public policy. According to him, “The
CRE market is seeing both an increase in demand and management decisions
to grow CRE exposures." He went on to say that it is to be expected
that the demand for infusing more capital into commercial real estate
will result in more government oversight.
The study showed that 35% of banks recognize that demand has risen in the
past twelve months. The survey also attests to stagnation or a lack of
change in regards to liquidity in the markets, underwriting standards,
interest rates, and capital rates. The rise in demand incites competition
between the 136 banks observed in the survey and the many banks that were
not. Within CRE lending, they state that community banks and regional
banks outside the surveyed demographic pose the greatest competition.
Davis went on to say, “Despite the regulatory atmosphere, CRE lending
remains attractive to many banks.” From 2016 onward, the banks worry
that regulatory burden in the CRE industry will trouble them the most.
65% of these banks are concerned that credit availability will be jeopardized
by regulation, which will concentrate its guidance towards CRE risk management.
Of the surveyed banks, half claim to possess outstanding loans dubbed “high
volatility commercial real estate” (HVCRE). Because their loans
were labeled as HVCREs—a condition that incurs increased capital
costs—over a third of said banks have raised their pricing.
The ABA considers “all acquisition, development and construction
(ADC) commercial real estate loans” to be HVCREs, except for “One-
to- four family residential ADC loans” and “Commercial real
estate ADC loans that” happen to “meet applicable regulatory
LTV requirements.” The borrower must also have “contributed
cash to the project of at least 15 percent of the real estate’s
‘appraised as completed’ value before the advancement of funds
by the bank.” Furthermore, the borrower contribution is required
to remain on the project until permanent financing is obtained, or the
loan is sold or paid in full.
The banks interested in CRE loans are still concerned over regulatory matters
but nonetheless aim to meet the glaring demand of an expanding market.
If you would like more information on this topic, please contact
Melissa Martorella, Esq. at our main office line (949) 379-2600.