Garnet Capital Advisors Blog

EXCERPT: The commercial real estate lending sector has seen rapid growth since the finance crisis more than eight years ago, but a slowdown in lending is pointing to a potential plateau and shrinking of the bull market for CRE.  

Commercial real estate lending is on the decline as large investors and private equity firms continue to pull back from this sector.  

As a slowdown in commercial sales activity continues along with regulator concern over the commercial lending industry, CRE lending by various financial institutions is trending downwards. Big investors have been selling off commercial property assets lately as signs that the bull market for this specific asset class point to stalling.  

According to the Mortgage Bankers Association, lenders closed approximately $491 billion in commercial mortgage loans last year. The slowing in commercial property sales during this time period meant fewer buyers required loans, which played a big part in this decline.

Investors Pulling Back From CRE Activity

Investor activity in the commercial real estate realm showed an even greater decline, as investors bought $493.7 billion in commercial properties in 2016, a drop of 10 percent from the year before. Such declines are continuing into 2017 and are picking up steam. According to Real Capital Analytics, investors purchased $50.3 billion in commercial property over the first two months of this year, nearly $30 billion less over the same two-month period in 2016.

As commercial property values have been on the increase for nearly a decade and have hit near-record highs, there is heavy speculation that the bubble will burst sometime soon.

Industry regulators are also worried about risk-laden CRE lending. By the end of Q4 2016, 521 financial institutions with potentially high-risk concentrations were insured by the Federal Deposit Insurance Corp. (FDIC), up from 474 institutions in Q3 2015.

Exposure to Risk Remains a Concern

Many banks and insurers are still exposing themselves to high-risk levels by continuing to be overzealous with CRE deals even as investment in this particular sector continues to slow. Many still perceive the commercial property market as a robust one, considering the increase in occupancy and rental rates.

Financial institutions and insurers are still being exposed to potentially high risk with over-aggressive CRE deals, even as the sector is showing signs of slowing.

Many lenders are making riskier loans including financing new construction as rental apartment building has exploded. Over Q1 2017, construction and land loans increased 12.8 percent on bank balance sheets compared to the same quarter last year. 

Some banking heavyweights are anticipating big gains in this sector, with the likes of Wells Fargo & Co. - the largest commercial real estate lender in the U.S. - anticipating as much as $30 billion in commercial loans in 2017, which is roughly on par with the previous two years. Having said that, the bank is well aware that commercial property values are hitting record highs following a sharp increase since the financial crisis lows.

Construction CRE Still Strong

Where regulators see concern is over the rapid and aggressive pace of construction in commercial buildings and the massive volume of such activity. The fact that such a pace has been maintained for years is also cause for worry. If this rapid construction pace keeps up, there could very well be an oversupply with a subsequent lull in demand in the near future, placing banks and insurers with balance sheets that are heavy in CRE loans in a potentially risky position.

Loan Sale Advisory Services: Helping Lenders Revamp Their Loan Portfolios Amidst a Potential CRE Slowdown

With a decline in commercial real estate lending comes the need for banks and insurance companies to reevaluate their loan portfolios and balance sheets in an effort to optimize them. Garnet Capital’s in-depth understanding of the loan sale and acquisition processes allows us to effectively help financial institutions and insurance firms with buying and selling. In addition, our longstanding relationships with various buyers provide sellers with the peace of mind and confidence knowing that their loan portfolios will trade at anticipated pricing levels.

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