The baseball credo "hit 'em where they ain't" might be the best way to describe some bankers' unlikely advice that now is the time to revisit commercial real estate lending.
Like a batter aiming to hit the ball away from opponents, the contrarians argue, bankers should take note of the crowding field of players in the commercial and industrial market. That trend leaves CRE wide open for those that are able to lend—and willing to challenge conventional wisdom. "There are only so many seats at the table for C&I lending," says John Tranter, the president and chief executive at Gulfstream Business Bank in Stuart, Fla.
Though 80 percent of its portfolio is in commercial and industrial loans, Gulfstream is taking a serious look at CRE, simply because it is one of the few Florida banks in a position to do so. "If you are under the regulatory caps, you should be doing more CRE," Tranter says. "Your pricing power is going to be phenomenal."
Regulators are keeping a close eye on bank portfolios where commercial property loans make up more than 300 percent of total risk-based capital, excluding loans where the borrower owns the office or plant it occupies. There is even more scrutiny of construction and land development loans, where regulators' concerns grow if a portfolio tops 100 percent of risk-based capital. Some banks are having to purge CRE credits from their books because of various regulatory orders.
Tim O'Brien, a managing partner at Sandler O'Neill & Partners, estimates that 20 percent to 40 percent of all U.S. banks are at or above those levels, creating opportunities for those who are below them. "There is still room for CRE loans, including those involving investors" that buy properties, he says. "I am even hearing talk that some are making construction loans again."
Granted, there may not be overwhelming demand for CRE loans right now. But some observers say that banks with the capital strength and willingness to do CRE loans can be selective in choosing their customers and control terms simply because of less competition. C&I, in contrast, is susceptible to competitive pricing and loosened credit standards, they say.
Tranter, whose $573 million-asset bank has long specialized in business lending, estimates that banks shifting to C&I from CRE are taking a 40 percent hit to their prospective earning assets as a result of the move—a harsh reduction in profit potential for banks still trying to recover from the financial crisis.
"The quality of CRE opportunities, rather than the quantity, is going to be robust," says Steven Sandler, the CEO of Crosswind Capital LLC, which buys distressed assets. "There is a slow and steady business."
D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte, says regional and big banks would be the most likely beneficiaries, particularly those that have already left the Troubled Asset Relief Program and have small CRE concentrations.
Plath says Bank of America, Citigroup and BB&T stand out as possible leaders in CRE lending, while Sandler points to foreign banks like Deutsche Bank AG and Barclays PLC.
Some big players, meanwhile, are scaling back, including GE Capital, which may eventually halve its $80 billion CRE portfolio.
Commercial realty has its share of hits and misses when it comes to property types, experts warned. Tranter said it would be unwise to re-enter construction loans, particularly residential development. He said better opportunities await in shopping centers and, in the longer term, apartment communities.
Plath said that, while CRE deals might be possible in relatively strong markets like North Carolina, he doubted there would be much activity in states such as Florida and California, where valuations have not yet firmed. Banks that are willing to make loans now also have a chance to win over a client who could, over time, move over deposits and take advantage of fee-based services. "If you have the right piece of property in the right market, it is a lot easier," Plath said. "If so, you can cherry-pick a market."
