Posted on October 1, 2016
Small Banks Shrinking Away From Commercial Real Estate
According to reports, small banks have begun to shrink away from commercial real estate, opting out of financing the market as federal regulators increase inquiries and surveillance around lending.
The Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency issued numerous warnings to commercial real estate lenders and banks, regarding loan terms and their need to strengthen them. This has provoked countless smaller banks to sell off loans and retreat from the prospect of acquiring new ones. Consequently, other institutional lenders, including private equity funds, are scrambling to fill in the gap. Currently, there’s less competition for $5 million to $10 million commercial property deals. This is particularly true when loans are affiliated with redevelopment or construction projects, which are widely considered to be riskier because these properties don’t generate income.
Institutional investors (i.e. pension funds and private equity) have been partnering with commercial property brokers, due to the fact that banks took a step back and foreign banks took a step forward. Regulators have been warning banks about being overly aggressive, with regard to commercial real estate lending. Banking agencies will proceed to pay close attention to potential risks associated with commercial real estate lending. Some of the commercial loans that banks recently put up for sale, but not buy, is due to weakened loan terms and other features. With the capacity to make $10 million to $20 million in commercial loans, banks don’t want to aggressively compete for loans. The relationship-based lending is sought after by lending officers and banks.
Learn more about small lenders deviation from commercial real estate by reading the New York Times article “Scrutiny of Commercial Real Estate Loans Chills Small Lenders.”