The nation’s bankers are sounding more optimistic about the commercial real estate markets than at any time since the onslaught of the Great Recession in 2007. In their second quarter earnings conference calls over the past week, several spoke of plans to re-enter the CRE market or actually reported CRE loan growth already.
Bankers also reported increased demand from CRE borrowers and increasing competition for new business – particularly multifamily. The level of interest in CRE lending was similar from both big banks and community banks.
“Proof of the increased debt availability can be seen in the significant increase in second quarter sales volume versus the same period last year,” said Chris Macke, senior real estate strategist for CoStar Group.
“$73.7 billion in sales were recorded in the second quarter 2011 alone; that compares to $44.5 billion in second quarter 2010,” Macke said. “We haven’t see a non-fourth quarter number that high since the third quarter of 2007; and maybe most importantly up from $51.1 billion in first quarter of 2011.”
“What we hope to see next is an increase in the debt available for smaller acquisitions in non-gateway cities,” Macke said.
Part of the reason for the lenders’ optimism is that the asset quality of the banks’ commercial real estate books is showing steady improvement. The recovery in delinquency rates that began in mid-2010 appears to have resumed after stalling in the first quarter, according to Matt Anderson, managing director of Trepp.
Anderson is estimating that the total delinquency rate could fall to 5%, down from 5.4% in first quarter. If that proves true, the estimated drop would be the largest since this segment began to recover in mid-2010.
Anderson reported that early results suggest that banks also have stepped up efforts to shed problem Commercial Real Estate (CRE) loans. Larger banks particularly have stepped up their disposals of problem loans.
So as the problems in their existing portfolios begin to go away, bank executives were saying growth can begin as soon as this quarter and be a real driver of growth next year, according to Bruce R. Thompson, CFO of Bank of America Corp.
“As we look at that commercial real estate number, we obviously, don’t like to see loans going down,” said Thompson of what is still happening at Bank of America. “At the same time, there was some stuff that you would have wanted to come off. We feel very good about where the commercial real estate portfolio is now and quite frankly, are trying to figure out places to do more commercial real estate where it makes sense.”
David Zalman, chairman and CEO of Prosperity Bancshares Inc. said his bank is going to focus more in third quarter on trying to come up with some pricing products for commercial real estate so that it can try to increase that area of growth.
James C. Smith, chairman, president and CEO of Webster Financial Corp. said commercial real estate lending represents a special opportunity for judicious growth. Strong originations in the second quarter more than offset a continuing high level of repayments; and the pipeline also has grown significantly, which bodes well for future originations.
Kelly S. King, chairman and CEO of BB&T Corp. in Winston-Salem, NC, said his company has a pretty good appetite for multifamily and expects that it can actually begin to grow its CRE book over the next several quarters.
Philip Flynn, president and CEO of Associated Banc-Corp., said his bank is starting to see a return on our investments for its CRE loan growth. In total, the Associated’s CRE and construction portfolio grew by $50 million to $3.9 billion in the second quarter. Commercial real estate will be a driver of the bank’s loan growth in 2012, he said.
The following excerpts from earnings conference call are typical of what we heard and generally reflect the overall current state of CRE lending.
Joseph Ficalora, President and CEO, New York Community Bancorp, New York
We’re seeing some very good opportunities at extraordinarily low [loan to values] with high-quality property owners that gives us the ability to participate in some real commercial properties that are, in fact, adding to that overall growth in our commercial loans. So, as we look to the future, we continue to see strength in that particular category. There is, in fact, as always the case, on that line, some properties that are driven by multiuse as we have talked about in the past.
But I think it’s important to recognize that some of these properties are very large properties that, in fact, we have discussions with regard to sharing some of those loans with others.
Growing Existing Relationships
Julia Gouw, President and COO, East West Bank, Pasadena, CA
On the commercial real estate front, loan balances increased $69 million, or 2% quarter-to-date. The growth in commercial real estate loans during the second quarter was largely due to expanding relationships with existing customers and new loans to new commercial customers.
Irene Oh, CFO of the bank
Most of them are existing relationships. We are not going to just do a transactional commercial real estate [loan]. If some of our current clients had opportunity to get good assets, commercial real estate, we’ll be willing to finance that. In addition, some of them are coming from new commercial loan customers, who, in addition to the business, they have an owner-occupied warehouse, or sometimes, additional investments, and we will do that. What we are not going to do is somebody just coming in, along with one-off transactions, buying a real estate, or just want to refinance one property.
Real Signs of Improvement
Russell Goldsmith, chairman and CEO, City National Bank, Los Angeles
By and large, economic conditions continued to show modest improvement. Here in California, the technology and entertainment industries are performing well, international trade is growing, tourism, agriculture and commercial real estate are also showing real signs of improvement, and in the geographies where we are located residential real estate continues to show some positive signs. The multifamily space is particularly strong.
We are actually kind of happy of the part that we have really been actively trying to grow, the commercial real estate mortgages or the finished portfolio, was up this quarter.
So finally we have had an increase there, which we are happy about, and we think there is other good things to come there. And you know, there is activity now on construction, I mean it is more on the multifamily front, so I’m really thinking, we’re not at the low point we are pretty close to it and that is starting to come back up a little bit.
Lot of Traction in the REIT Business
Jeffrey Weeden, CFO, Senior Executive Vice President, KeyCorp, Cleveland, OH
Average commercial real estate balances for mortgage and construction loans declined by a little more than $1 billion during the quarter, as market liquidity continued to remain good for these assets. We anticipate that the decline in commercial real estate balances will slow considerably during the third quarter and stabilize or potentially grow by the fourth quarter of this year. While our clients remain somewhat cautious compared to prior recoveries, our lending pipelines are solid, and we are actively supporting our clients’ borrowing needs.
Christopher Gorman, President of Key Corporate Bank, Cleveland
There’s a few things going on there. One is that we have very opportunistically delevered a lot of our clients, gone to the equity markets, gone to the commercial loan mortgage market. So that process has really kind of run through.
The second thing that’s happened is we have now successfully transitioned that book. When we started, we had about 60% of that book that was in construction. Today, that rests at 16%. And then at the same time… we really targeted these owners of real estate. And we’re getting a lot of traction. We have a lot of traction in the REIT business already. I think we lead 17% of all the publicly traded REITs in a financing perspective. But we’re also now getting a lot of traction with these owners of real estate. So not only are the exits diminishing, but we’re getting a build in the pipeline.
Trend Not an Aberration
Christopher Oddleifson, President and CEO, Independent Bank Corp., Ionia, MI
The commercial real estate portfolio grew nicely as well, and we continue to see good, well-structured deals. Our overall commercial pipeline is strong and this trend is not an aberration, but one in a series of double-digit growth quarters in our commercial portfolio.
Importantly, I can assure you that our success here is not coming from any relaxation of credit standards on our part; rather it is a direct result of our focused efforts over the last two years to cultivate and grow this business. Our emphasis on serving as a reliable source of credits through thick and thin, maintaining high visibility in the marketplace, and adding experienced lenders to our ranks is really paying off.
Alvin D. Kang, CEO, Nara Bancorp Inc., Los Angeles
Our commercial real estate portfolio increased $29.1 million or 7% on an annualized basis. The majority of the increase came in our gas station portfolio as we had the opportunity to extend financing to a very large operator of gas stations in metropolitan areas that has strong capital liquidity and cash flow. We had a very strong pipeline entering the second quarter, which contributed, to the loan growth we experienced.
Capacity To Grow Not the Will
Daniel Poston, CFO and Executive Vice President, Fifth Third Bancorp, Cincinnati, OH
We saw continued runoff in the commercial mortgage and commercial construction books, although the rate of decline continued to slow. Average CRE balances were down $403 million or 3% sequentially. We’d expect to see continued runoff in these portfolios in the near to intermediate term, although at a continually slowing pace.
We’re not really originating much in the way of new CRE loans, though we do have the capacity to do so. We wouldn’t expect to see — to have much of an appetite for non-owner-occupied CRE until we see a better balance between the supply and demand for space. (credit, m.heschmeyer, co-star)