Wednesday, May 16, 2012

Banks Finally Willing To Catch Up on CRE Borrowing Demand - CoStar Group

Banks Finally Willing To Catch Up on CRE Borrowing Demand - CoStar Group

Multiple Lending Sources Now Offering Programs for CRE Properties
May 16, 2012
www.costar.com
Having experienced stronger demand over the past three months, banks have started easing their lending standards for commercial real estate

The move is another signal that banks are more willing to start growing their CRE loan portfolios as they have in other lending areas. 

The banking sector overall also has substantially improved its liquidity position over the past few years. Indeed, large banks in the aggregate have more than doubled their holdings of cash and securities since 2009, according to remarks last week by Ben S. Bernanke, chairman of the Federal Reserve System. The credit quality of large banks' assets is looking better as well, although the improvements have been uneven across types of 
loans. 
In the aggregate, delinquency rates on loan portfolios at large banks have declined substantially from their peaks. However, while delinquencies on commercial and industrial (C&I) loans and consumer loans have fallen to the lower end of their historical ranges, delinquencies on loans backed by commercial or residential real estate have declined only moderately and remain elevated, Bernanke said. 

Notwithstanding the various headwinds, credit conditions in the United States have improved significantly in a number of areas. Many--though certainly not all--businesses and households are finding it easier to borrow than they did a few years ago, in part because of better conditions in financial markets more broadly. 

"In a market that has been in flux for the last few years, the lending environment continues to be the shining beacon of hope," said Gary Goss, senior vice president debt placement services at Cassidy Turley San Diego. "The abundance of competitive lending sources and very low interest rates, combined with an absence of significantly damaging global economic news over the past few months, has created an excellent environment to finance commercial real estate." 

"Twelve months ago, lenders (for the most part) were seeking permanent debt for multi-family, industrial, retail and office property types alone," Goss said. "In recent months, we have noticed a rise in multiple lending sources offering programs for construction, hospitality and special use properties and we expect them to continue to expand their lending types as a way to satisfy their huge appetite for accumulating loans. Mezzanine debt and Joint Venture Equity financing is also plentiful and is playing a major role in making up for the downward shift in lower leverage senior debt." 

Overall, at this point in time, the debt markets appear to be in a very good state as clients see this as an opportunity to capitalize on favorable financing conditions, Goss added. 

Signs of improvement notwithstanding, the boost in loan growth is not without a potential downside. 

While loan growth adds to a bank's earning assets, growing loans faster than deposits can also put pressure on banks' liquidity, according to Moody's Investors Service. 

"Despite our favorable view of recent loan growth, as the economy recovers, history suggests that underwriting standards will deteriorate," Moody's analyst wrote in their most recent weekly credit markets report. "Already, a number of banks mentioned in their recent quarterly earnings teleconferences that loan pricing competition has increased. Our experience has been that after affecting price, competition typically weakens loan structures and covenants. Once that occurs, it will translate into asset quality problems down the road. Therefore, a leading indicator for banks' asset quality will be the pace of their loan growth relative to overall economic growth." 

For now, though, Moody's said that is not a worry because U.S. banks' are in the enviable position of having more deposits than loans. 

The recent loan growth is also positive because it typically represents customer growth. An indication that this is particularly true now is the fact that most banks have not reported an increase in credit line utilization rates.