KBW Conference: Bank retreat? Think again

While the banks may be shifting away from construction loans, they continue to lend aggressively, executives said at a Keefe, Bruyette & Woods conference in Manhattan. Al Barbarino reports.

Despite much speculation to the contrary, the banks continue to be a major force in CRE financing.

Speaking at the KBW (Keefe, Bruyette & Woods) Mortgage Finance Conference in Manhattan on 1 June, industry executives noted that, while perhaps shifting away from construction loans, the banks remain ‘unabatedly’ active throughout the market.

Stuart Rothstein
Stuart Rothstein

“Everybody keeps asking us if the banks are pulling back, and there’s been no indication whatsoever that the banks are pulling bank” said Stuart Rothstein, CEO of Apollo Commercial Real Estate Finance (ARI).

Rothstein described the banks as “unabatedly moving forward,” which he said was apparent both as a lender competing with the banks on transitional first mortgages, but also as a borrower through the ARI’s real estate private equity business as a borrower.

“When we invest equity and when we put loans out to bid or are looking to finance deals, the banks are showing up and they haven’t gone away,” he said.

KBW research backs that up. In 2015, banks originated 28 percent of commercial real estate debt, more than any other investor group. The only stronger showing from the banks occurred in 2008. (The data goes back to 2005).

In a measure of outstanding CRE debt held by investor group (excluding multifamily debt which is understood to be dominated by the GSEs), the banks blew away any other group in 2015 with 56 percent of the market share – the highest percentage going back to 1960. (See chart below).

Regulators are aiming to prevent the risky behaviour that led up to the recession. Through Basel III, for instance, regulators created the High-Volatility Commercial Real Estate (HVCRE) category, under which many construction loans fall. The HVRCE loans now receive a 150 percent risk weighting on a bank’s balance sheet versus the previous 100 percent, so banks with heavy exposure to such loans could be shifting away from construction loans.

Executives representing the non-banks, including Blackstone Mortgage Trust, Starwood Property Trust, Mack Real Estate Group and Walker & Dunlop, did suggest at the KBW conference that this was creating opportunities for them, particularly in construction lending.

“There’s a massive opportunity for companies like Walker & Dunlop to do things in the shadow banking space,” said Willy Walker, chairman and CEO of Walker & Dunlop.

The so-called shadow banks have thus far eluded regulations, but for the banks they seem to be having their intended effects, with plenty of capital still available without some of the risky lending that happened last cycle.

Aside from CMBS, the CRE finance market is still “incredibly liquid,” said Mark Gibson, executive managing director and CEO at HFF, one of the largest CRE debt intermediaries in the country. He added that the banks have remained conservative, with loan-to-values nowhere near the previous peaks.

“The banks have higher quality portfolios than at any time in their history from a commercial real estate standpoint,” he said.

Commercial Mortgage Debt