WASHINGTON, DC—Banks increased lending to commercial real estate in 2014 by a significant degree, according to a new report by Chandan Economics. There was also a measurable uptick in aggressive underwriting by these institutions, CEO Sam Chandan tells GlobeSt.com.
First, the numbers: Banks’ net lending on commercial and multifamily real estate and construction projects jumped $103.7 billion during 2014, according to Chandan Economics’ Q4 2014 Bank Lending and Default Report. This follows an increase in net lending of $71.4 billion in 2013 and a decline of nearly $8 billion in 2012.
At the pre-crisis peak, net bank lending increased by more than $200 billion in 2005.
Carving out construction finance, net lending on commercial and multifamily real estate increased by $75.1 billion over the year and by $25.2 billion during the fourth quarter, to an all-time high of $1.45 trillion, according to the report. Multifamily mortgages accounted for just over half of the fourth quarter’s net new lending.
Net construction lending increased for the seventh consecutive quarter, by $7.9 billion from Q3 to Q4 2014 and by $28.6 billion from the prior year. Excluding small residential properties, the quarter-to-quarter growth in net construction lending was $6.8 billion. Here, though, there is room for pause, Chandan notes. “We are watching closely for any change in momentum as more onerous regulatory capital treatment of construction loans come into force,” he says. “It is not clear at this point that it will materially reduce construction activity, but it demands monitoring.”
Otherwise, though, it is clear banks have a robust appetite for CRE loans as aggressiveness in the underwriting continues to increase, he says. Competition among lenders as well as other capital sources is one reason, he says. “There is tremendous variation in scale and capabilities across the banking sector, but the increase in lender density is a fairly consistent feature across property types, primary and secondary markets, and core and value-add.”
Another area about which Chandan sounded a possible alarm was the increase in the use of interest-only structures, which he called “problematic.”
“This is especially the case in the apartment sector, where current underwriting offers little room for weaker fundamentals coinciding with higher interest rates,” Chandan says.
That said, the report also noted that the level of distressed CRE has fallen to its lowest level in seven years and banks have made significant progress in clearing non-performing legacy loans from their books. The default rate on banks’ commercial and multifamily mortgage portfolios fell to 1.1 % during Q4 2014, the lowest level since Q1 2008, while the default rate on construction and development loans dropped to 2.1% during the Q4 2014, just a fraction of the double-digit default rates reported for construction loans through mid-2012.
