Disciplined Lending May Return to Commercial Realty Markets, Based on Earnings Conference Call Remarks
“If the market is going to get a little goofy … we’re simply not going to chase that,” Kevin Hanigan, president and president of LegacyTexas Financial Group. Image credit: LegacyTexas Financial Group
It has actually been unusual in the previous number of years to hear U.S. bankers speak in a nearly consentaneous voice about the market for commercial property financing. Nevertheless, the message they have actually been delivering in their second-quarter earnings teleconference in the past week has been consistent: growth on the origination side needs to slow.
Provided the economy is well into one of its longest-running growths in history and the reasonably high present valuation of industrial residential or commercial properties, it is time to be more prudent, selective and disciplined in making commercial real estate loans, they stated.
Nevertheless, what they have reported instead is a market flooded with lending institutions of all stripes ready to cut costs to the bone to complete for the greatest quality assets– as well as some lower quality properties.
“The competitors here is as broad as it has ever been,” John Shrewsberry, chief monetary officer of Wells Fargo & & Co., told investors. He said that in between life insurance coverage companies, home loan property financial investment trusts, property supervisors and sovereign wealth funds, “any pool of capital that is out there looking for return has actually got its finger in the pot of business realty financing.”
That has led to a deterioration in underwriting requirements in the industry, the bank holding company stated. The weakening underwriting is not near where it remained in 2006 and 2007 before the last recession when banks were informing their loan officers to stop writing loans, however it has actually reached the point where they are concerned about the prices of long-lasting deals in an economic expansion that might not have much more time left.
“On the loan side, we’re seeing a great deal of aggressiveness in the marketplace both on rate and structure,” said Chris Myers, president and president of CVB Financial Corp., moms and dad business of People Business Bank in southern California. “We’re seeing business real estate loans where banks are giving interest-only periods for loans that are 70 percent or 75 percent loan-to-value, and we truly fight with doing that.”
Myers said, “We can contend on cost, but there needs to be a risk-return part in these decisions. And sometimes I am not seeing anyone integrate in any credit threat. There is just pricing down to the bone here which has caused us to pass on some deals.”
Kevin Hanigan, president and chief executive of LegacyTexas Financial Group in Plano, Texas, among the most active industrial realty markets in the country, runs a bank in an area in which borrowers have been able to press back a little bit on a few of the things that banks typically request in underwriting deals.
Nevertheless, Hanigan is blunt about not following the crowd.
“We’re not going to chase it,” Hanigan said. “We’re a 60 percent loan-to-value loan provider. If they desire us to compete on rate, we may try some floating-rate deals instead of the fixed-rate deals. However if the marketplace is going to get a little crazy … we’re simply not going to go after that.”
He added that it is “not going to end well,” saying, “I assure you that does not end well for whoever does those things. Discomfort will come. All the money on the sidelines in this economy may keep things propped up for a time period, however there will be a rate to be spent for letting that go.”
A number of other banks were echoing the same sentiment that they were not ready to reduce their underwriting requirements in spite of existing competitive pressures to do so.
That has lenders predicting loan growth this year to moderate to about 3 percent to 4 percent, below the 4 percent to 5 percent growth they expected at the start of 2018.
Those lowerings in loan growth will come from varying techniques. Some banks stated they plan to tighten the geographic areas in which they complete, others stated they look for to stop taking on brand-new clients, while others add they plan to change from investor customers to more owner-occupant borrowers.