Top US bankers have sounded caution over commercial real estate lending as concerns rise that bubbles are forming in parts of the country’s property market.
Lenders have helped fund a boom in recent years in cities such as New York and Miami, where luxury high rises have sprung up across the skyline.
But executives at several banks signaled during results season that they were tightening up standards for CRE lending, which includes mortgages secured against big apartment and office developments.
“We want to be careful on CRE,” said Brian Moynihan, chief executive of Bank of America, which has a $58 billion commercial real estate portfolio.
Richard Davis, chief executive of US Bancorp, told investors that the country’s fifth-largest lender by assets was being “very watchful”. “We’re protecting what we have, and probably being more careful,” he added. “A lot of the banks are growing that CRE a lot. It’s been flat for us.”
Richard Fairbank, founder of Capital One, the eighth-biggest US lender, said last week that “competition is pressuring loan terms and pricing in CRE. Still that also applies to loans for commercial and industrial businesses, and there are good growth opportunities in some areas.”
Rising rental incomes have made CRE look attractive at a time when rock bottom interest rates have reduced returns on offer from other assets. Property prices have swelled, helping push up the value of banks’ CRE loans by 11 per cent in the year to March to $1.83tn, according to data from the US Federal Reserve.
Banks increased their share of the US market from 34 per cent in 2014 to 41 per cent last year, according to Real Capital Analytics, the commercial real estate data specialists. They took share from originators of commercial mortgage-backed securities, which were disrupted by turmoil in the financial markets. Their share dropped from 27 per cent to 16 per cent.
In recent months the property market has softened, partly because difficult market financial conditions and the tumbling oil price have deterred cash-rich foreign buyers.
In February, sales of offices, apartment blocks, hotels and other commercial buildings collapsed by 46 per cent from the year before to $25.5bn, according to Real Capital Analytics — the biggest drop since 2008.
Meanwhile, banks are under pressure from regulators which have warned about risky lending practices. Watchdogs including the Fed have raised concerns about slipping underwriting standards at some institutions and have threatened to force them to raise additional capital if necessary.
Signs exist that banks are taking a tougher line. A survey of senior loan officers by the Fed in the first quarter found a net 23 per cent were tightening standards for “multifamily” projects — big apartment blocks. That was up from 7.5 per cent three months earlier.
Joseph DePaolo, chief executive of Signature Bank, said the New York-based lender was “being more selective”, although he added: “There is weakness in the higher end of the large-dollar co-ops, the large-dollar condos, but that’s not the market that we’re in.”
Peter Koh, chief credit officer of Wilshire Bancorp, said there were some “red flags” and added the Los Angeles-based bank was planning to “diversify away from CRE. It’s doing well in some ways, but … there is talk that some areas of the CRE market seem to be a little bit frothy.”
Kevin Hester, chief lending officer at Home Bancshares, said the Arkansas-based lender had “embarked on an effort to enhance our risk management practices in CRE.” He said the bank was “comfortable with our CRE exposure but cited regulatory scrutiny. We know it’s going to be a focus when the examiners come in next. They told us that.”
