The big national banks were so burdened with bad loans just as the recession was rolling in that many decided to seal up their checkbooks. As tough as it became to get a home loan, it got even harder to find capital for commercial real estate development. The too-big-to-fail banks are back now, but the commercial real estate landscape has changed. The major banks had severed ties to investors and developers, so the latter have turned to other relationships — private-equity pools have moved into the lending field, and many community banks have aggressively carved a niche in the smaller-loan market.
“For the last five years, we never even bothered to go to the large banks, because they weren’t financing many deals,” said Bradford Kitchen, president of Columbus, Ohio–based Alterra Real Estate Advisors. “In the height of the downturn, they were sending clients to other banks. A lot of smaller banks took business, and some of the bigger banks ruined long-term relationships with clients.”
Then there is the press from the equity side. “Equity funds pushed into the commercial real estate lending arena, particularly in build-to-suit, and we have done a number of deals across the United States with that structure,” said Gabriel Silverstein, president of New York City–based Angelic Real Estate. The big banks are pushing back. “I have a client in Detroit doing a build-to-suit on a specialty building, and the local bank is giving him 85 percent loan-to-cost, with partial recourse on a completion guarantee,” said Silverstein.
With these banks reentering the market, an already crowded lending field is getting still more competitive — at a time when good deals are getting harder to find. But the banks’ timing may not necessarily be viewed as bad or unfortunate, some say. “The banks are not late,” said Chuck Nwokocha, a senior risk management consultant at Raleigh, N.C.–based Sageworks. But “the lending market is definitely more competitive; the landscape has changed. Banks are competing with nontraditional lenders as well.”
One reason for the return of the big banks is that financial institutions have managed, with the help of a better economy, to fix many of their loan portfolios. Net charge-offs for commercial real estate loans were at 0.16 percent of average loan balances at the end of the second quarter, according to Sageworks. This is down from 0.9 percent at the end of 2009 and 13 basis points below second-quarter 2013. Loss rates for construction and land development have fallen from 3.58 percent on average loan balances in December 2009 to 0.24 percent in the second quarter.
“The message here is, it is a good time for banks to get back,” said Jack Ochs, manager of Sagework’s data-and-research team. “We’re looking at the loss rates, and there is definitely an argument that there is room for the banks to be back in commercial real estate lending.”
But even though confidence is back, a lack of good deals is impeding the market. Second-quarter loan originations for commercial properties were off by 2 percent, though up 34 percent from a very slow first quarter, according to the Mortgage Bankers Association. For retail, loan volume dropped 10 percent relative to the year-before period, while comparisons to the first quarter show loan volume up 64 percent.
Where did the banks figure in all this? The MBA reports a 19 percent increase for commercial bank portfolio loans from second-quarter 2013 to second-quarter 2014, while life insurance company loans, for example, fell by 13 percent, and commercial-mortgage-backed securities loans vaulted by 45 percent. On a comparison to the first quarter, commercial bank portfolio loans dropped by 12 percent, while life insurance loans jumped 47 percent and CMBS skyrocketed 132 percent.
“Everyone is back: banks, CMBS, life companies — it’s a good time to be a borrower,” noted Brandon Harrington, vice president of capital markets at Phoenix-based Walker & Dunlop. “A lot of the banks are shying away from the multifamily segment, where they have been active over the last several years, starting to go into retail, office and industrial.”
In 2010 the national banks controlled about 9 percent of the lending market, and regional and local banks held 11 percent, while insurance companies accounted for 23 percent, and CMBS represented 44 percent, according to Real Capital Analytics. Last year the national banks grabbed 12 percent of the commercial lending market, the regionals and locals took a 13 percent share, the insurers’ portion shrank to 15 percent, and CMBS held steady at 45 percent. Real Capital Analytics’ most recent numbers (September) show that national banks edged up to 13 percent, while regionals and locals took a big leap to 20 percent, insurers sustained another drop — to 7 percent this time — and CMBS held onto their 45 percent.
To be competitive, the national banks have had to address a couple of commercial real estate lending traditions: recourse debt and construction loans. “Recourse is still the norm for banks, although we are now finding [that] for certain clients, the banks will do some nonrecourse lending,” said Harrington. “Here in Phoenix, banks have maintained some element of recourse — maybe 10 percent to 20 percent minimum — and some banks are doing nonrecourse. In the Great Recession, the banks realized the recourse element wasn’t at all what it was cracked up to be, and now it is not as big an issue as it was before.”
In 2006, loans for construction, development and land took up all the commercial real estate lending of the banks, notes Nwokocha. “Essentially, these were the sectors most adversely affected during the housing and economic downturn. The pressure brought on by -regulators pushed banks to diversify their portfolios.”
The banks still have a “complete stranglehold” on construction financing, asserts Silverstein. “If you think about bank assets, they are not built to do long-term loans,” he said. “They are built for shorter-term, one-to-five-year loans, because that matches their assets to liabilities. Most bank assets are demand deposits. Banks don’t want to have to pay out short-term deposits with long-term loans.”
If a shopping center developer decides to do a bank loan for development or to refinance an old loan, even that means entering a competitive world. “The community banks are extremely active and trying to stay relevant,” noted Arlon Brown, a senior vice president with the Framingham, Mass.–based Parsons Commercial Group. “They certainly took up the slack during the recession from some of the national banks.”
Lately, Brown finds himself working more with regional banks, which are bearing the brunt of the competition from the now-aggressive national banks. Where Brown puts together financing depends on the size of the deal. From $1 million to $10 million, he will consider a community bank — although the one major handicap with small banks is that they tend to prefer lending in five-year increments. A smaller bank may give a 10-year commitment, but it would be subject to review after five years.
For a $10 million to $20 million financing, Brown would go regional or national. “A lot of banks don’t become competitive once the loan amounts pass $10 million, because that’s when the life companies, private-equity funds and CMBS funds steal market share,” said Harrington. “Today most shopping center deals are still CMBS and with life companies.”
