Many loan officers are getting worried about commercial real estate overheating, and regulators are cracking down on heavy concentrations. So why are the CRE portfolios at a handful of banks getting bigger?
Maybe it’s a case of throwing caution to the wind, but the head of one of them — Jeremy Starkey, president of commercial real estate finance at the $8 billion-asset TowneBank in Portsmouth, Va. — says there are still good opportunities in the CRE space.
“Our sweet spot is $5 million to $15 million deals, and there are a lot of borrowers available to do those kinds of deals in our markets in the Hampton Roads and Richmond” areas in Virginia, Starkey said.
Starkey is either crazy, or crazy like a fox, depending on whom you ask. No matter which side you take, TowneBank and other lenders will take whatever they can get.
Broader loan demand remains spotty, even amid some positive economic indicators. Multiple interest rate hikes, which would fatten margins, are anticipated but not guaranteed. And tax cuts or regulatory relief are far from certain, which made some potential commercial borrowers hold back.
So it makes sense that some lenders — such as the $25 billion-asset Hancock Holding in Gulfport, Miss., and the $5 billion-asset Luther Burbank Savings in Manhattan Beach, Calif. — were willing to originate more CRE loans in the first quarter compared with the previous quarter, said Matt Anderson, managing director at Trepp. Hancock's total rose 18%, and Luther Burbank's rose 12%.
“Some of the demand isn’t as strong as it used to be, but there is still growth out there,” Anderson said. “Yes, banks have sharpened pencils and tightened standards a bit. But we’ve recovered [from the financial crisis], and delinquencies and defaults are down.”
Banks have also been willing to expand their exposure to the CRE sector through acquisitions. CRE loans rose 229% on a quarterly basis at the $3 billion-asset Security Bank of Kansas City in Kansas, largely due to its recent purchase of assets from Valley View Bancshares in Overland Park.
To be sure, there are plenty of reasons to question the wisdom of the countertrend lending strategy.
Namely, many banks were hurt — and a large number failed — when CRE collapsed during the financial crisis nearly a decade ago. Many lenders want to avoid a repeat.
U.S. Bancorp CEO Andy Cecere said the Minneapolis company has made a conscious decision to tap the brakes on CRE loans because of risk concerns.
“We’ve lagged in growth there because we have pretty stringent standards that we stuck to,” he said Tuesday at the Deutsche Bank Global Financial Services conference.
Aggressive CRE lenders risk crossing swords with their regulators, too.
Regulators prefer that banks maintain a ratio of commercial real estate to total risk-based capital of less than 300%, said David Swartz, an attorney at Stevens & Lee in Reading, Pa.
“If your CRE is high as a percentage of capital, [some lenders] may be asking if they’re better working through it, or look at whether it’s better to sell,” Swartz said.
But none of those reasons deterred a band of banks of various types — including Citizens Financial Group in Providence, R.I.; Flagstar and Ally banks in Detroit; and BOK Financial in Tulsa, Okla. — from building up their CRE books, perhaps in some cases taking advantage of the pullback by rivals.
Even Goldman Sachs and Raymond James Bank, both predominantly investment banks, reported double-digit growth in CRE loans on a linked-quarter basis.
Some lenders are attracted to specific market niches. Capital One Financial’s portfolio of multifamily loans, which are a component of regulators’ CRE calculations, rose 4% to $11.6 billion in the first quarter.
“A big part of our CRE portfolio is New York multifamily … rent-stabilized apartments,” Chief Financial Officer Scott Blackley said Tuesday at the Deutsche Bank conference. “We think that multifamily is a pretty strong part of the overall real estate economy.”
It may also be that they like what the market is giving them. Starkey at TowneBank said he’s seen good lending opportunities in his markets with one specific type of CRE development.
“We’re seeing an increase in neighborhood office centers — that might include a dentist, an insurance agent and a restaurant,” Starkey said. “That’s a good CRE loan. As opposed to big-box stores or regional malls.”