The comeback of commercial real estate lending is gaining momentum, especially credits backed by apartments and leased properties.
CRE lending was a scourge for scores of community banks during the financial crisis, but more banks are warming up to it in their quest for higher returns, experts say. However, CRE lending volumes remain well below the highs of five years ago.
"We still believe that the trend of stronger growth in CRE is going to continue," Dunson Cheng, the chairman and chief executive of the $11 billion-asset Cathay General Bancorp (CATY), said during a quarterly conference call held last month.
Multifamily lending rose 7% in the first quarter compared with a year earlier, to $237 billion, according to the Federal Deposit Insurance Corp. Loans involving leased properties including offices, hotels and warehouses rose 2%, to $602 billion. Industry experts, by and large, believe the second-quarter data will show further growth and an ongoing reversal of past trends.
Commercial real estate loans typically carry higher yields and more risk than many other loans, says Chris Marinac, an analyst at FIG Partners.
"There is a real concern about CRE because of what we went through," Marinac says. "There were some real losses, but, by the same token, you tend to get better deals with those loans. You get higher yields than in auto lending."
Some areas of CRE lending are more attractive than others depending on the lender's tolerance for risk. Though loans backed by owner-occupied properties only held steady year over year, many banks prefer them because they do not count against loan concentration limits mandated by regulators, says Thomas Wiley, president of the $2.6 billion-asset State Bank Financial (STBZ)
At March 30, CRE loans made up 44% of total assets at the Atlanta company, the 23rd-highest percentage among all institutions with at least $1 billion of commercial and real estate loans, according to SNL Financial.
Dime Community Bancshares (DCOM) in Brooklyn, N.Y., and Oritani Financial (ORIT) in Washington, N.J., have the highest percentages of CRE loans, as a percentage of total assets. That's consistent with the Northeast, where CRE is frequently a big part of loan books, Marinac says.
CRE made up 87% of total assets at the $3.9 billion-asset Dime and 74% of total assets at the $2.8 billion-asset Oritani.
Such concentrations often serve as red flags, but Dime and Oritani have shown that they can handle those high levels of CRE concentration, Marinac says.
Nonperforming assets made up just 0.24% of total assets at Dime at March 30. Only 1.02% of Oritani's assets were classified as nonperforming. The banks also maintain sufficient reserves to cover more than three years of potential losses.
The right mix of CRE loans can attract acquirers. When CenterState Banks (CSFL), a $2.4 billion-asset company in Davenport, Fla., agreed to buy Gulfstream Bancshares last month, a draw was the $572 million-asset seller's loan book, Joseph Fenech, an analyst at Sandler O'Neill, wrote in a note to clients. More than two-thirds of the Stuart, Fla., company's CRE loans involve owner-occupied properties.
In addition to owner-occupied properties, State Bank also favors lending to investors who have bought CRE properties after steep value declines. Such investors "are attractive to us because there's significant equity injected into these projects," Wiley says.
Conversely, a bubble seems to be forming around multifamily lending, as more lenders compete for a limited number of deals, Wiley says. "From my perspective, when there's a thundering herd going after one type of business, we typically pull away," he adds.
On the other hand, multifamily is a key plank in some banks' CRE strategies. The $16.1 billion-asset Astoria Financial (AF) in the New York area derives about 85% of its multifamily loan book from rent-controlled apartment buildings, says Monte Redman, president and CEO. Rent-controlled buildings are beneficial to the lender, because residents have an incentive to remain in their apartments and not default on their leases, and because rent is guaranteed to rise by a small percentage each year, he says.
Intense competition extends beyond multifamily in some markets.
BBCN Bancorp (BBCN) in Los Angeles, where CRE loans make up 60% of total assets, has seen a glut of lenders entering bids for CRE loans, Kevin Kim, the $5.9 billion-asset company's chairman and CEO, said during a recent conference call to discuss second-quarter results.
"We're also starting to see more activity from smaller Korean-American banks that have recently exited from regulatory enforcement actions and are eager to put their capital and liquidity to work," Kim said.
Other banks are forecasting continued growth in CRE lending for the rest of 2013. At the $35 billion-asset First Republic Bank (FRC) in San Francisco, CRE loans rose 15% at June 30 compared with a year earlier, to $3.1 billion.
"We are well known in this field, as we have been doing it since the beginning of the bank, actually," Jim Herbert, First Republic's chairman and CEO, said during a quarterly call held last month. "We did hire a couple of new loan-relationship managers that have a particular focus on commercial real estate, and they're doing a lot of business."