The mythical retreat of the banks

The banks haven’t exactly ‘pulled back’ from commercial real estate lending, but they have shifted focus. And that’s not a bad thing… “The banks are pulling back due to regulations” seems to have become part of the accepted CRE finance lexicon. The only problem is that, on the whole, based on facts and comments from […]

The banks haven’t exactly ‘pulled back’ from commercial real estate lending, but they have shifted focus. And that’s not a bad thing…

“The banks are pulling back due to regulations” seems to have become part of the accepted CRE finance lexicon.

The only problem is that, on the whole, based on facts and comments from industry insiders, it’s simply not true.

“Everybody keeps asking us if the banks are pulling back, and there’s been no indication whatsoever that the banks are pulling back,” said Stuart Rothstein, CEO of Apollo Commercial Real Estate Finance (ARI), last week at the KBW (Keefe, Bruyette & Woods) Mortgage Finance Conference in Manhattan.

In fact, 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 ARI’s real estate private equity business.

“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.

But don’t just take Rothstein’s word for it.

These facts and figures show that the banks have continued to both originate and hold more CRE debt than any other investor group:

-In 2015, banks originated 28 percent of CRE debt, more than any other investor group, according to KBW Research. The only stronger showing from the banks occurred in 2008. (The data goes back to 2005).

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-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.

-That 56 percent is the highest percentage going back to 1960. (See chart).

In addition to the strong 2015 performance, a new report from CBRE shows that the banks only picked up the pace in Q1 of 2016 as the CMBS market faltered, accounting for 43 percent of non-agency CRE loan originations compared to 28 percent in Q1 2015.

This all seems at odds with the commentary that’s permeated the industry, in part stemming from statements bank CEOs are making on conference calls, noted one KBW analyst, suggesting that “perhaps that’s to gain attention from regulators who are increasingly scrutinizing their activities.”

But that scrutiny is justified, as regulators aim to prevent the risky behavior 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, all suggested at the KBW conference that this was creating opportunities for them, particularly in construction lending.

“I count our lucky stars every day that we are not a bank,” said Willy Walker, chairman and CEO of Walker & Dunlop. “There’s a massive opportunity for companies like Walker & Dunlop to do things in the shadow banking space.”

The so-called shadow banks have thus far eluded regulations, and a point they will often make is that they shouldn’t be regulated because they are dealing with private investors who have entrusted them with their capital.

As for the banks, the regulations seem to be having their intended effects, with plenty of capital still available without some of the risky lending that occurred last cycle.

The banks remain active and, 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. Yet 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.

The banks aren’t “pulling back” from the market. But, whether by choice or not, they have shifted their focus away from riskier lending, including construction loans. Even if banks continue to decry regulations, they have led to safer lending from the largest CRE investor group. And for that the industry should be counting its lucky stars.

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