Don’t Bite on the Lending Hype

Something to think about with the regional commercial real-estate scene: An article published last week by the Financial Times said Commercial Real Estate lending is shrinking in a big way.  Not 2006-2007 big, but still steeply enough to take notice.

U.S. bankers, the article says, “have warned about mounting risks in commercial real estate, with figures showing they are putting the brakes on loans to buyers of office buildings, hotels and shopping malls,” citing entities like J.P. Morgan, Wells Fargo and other major national institutions. 

But is that really a significant enough departure from the norm to warrant high concern? When you look at the Kansas City market you’ll find that, in our region, the loans have actually been going up, relatively.

According to data from the FDIC, as of March 31 this year the overall net leases and loans on the books in the Kansas City MSA rose a modest 15.07 percent since the end of the first quarter in 2008. What’s more interesting is the movement within the lending categories. For example, construction and development loans are still down nearly half from 2008, however, that sector has recovered to $3.66 billion this year from the low point of $1.70 billion in the first quarter of 2013.

For commercial realty in Kansas City, loans hit $1.29 billion this year. They were sitting at a nadir of $819 million in the first quarter of 2008—a 72.65 percent increase over the decade. Lending for farm operations and farmland nearly doubled and commercial and industrial lending is up more than 39 percent for the decade. Neither of those categories can touch municipal borrowing, however.  That category skyrocketed from $278.80 million in Q1 2008 to $1.04 billion in 2017, coming back into the atmosphere a little at $1.01 billion this year.  Still, a 262.72 percent increase over the decade is nothing to shake a finger at. So why the hype right now about CRE lending?

“It’s a topic that’s relatable to almost everybody, so it makes the news when big banks say ‘we’re going to worry about real estate,'” says Greg Sims, the Managing Director for Kansas City Real Estate Banking at CrossFirst Bank, adding, “That said, there’s always been some degree of cautiousness, especially after the last financial downturn.”

It’s not as much skepticism on the part of banks, he says, just a general level of caution when looking at potential real estate loans.  Hotels, office buildings and shopping malls generally carry a higher level of scrutiny, says Sims, “For this reason, many banks have been more selective on loans related to these property types for a number of years.”

But just because some banks have slowed down or stopped, it doesn’t mean all banks have. When you look at numbers of decline, you also have to qualify it with where those numbers started. The article points out that one bank’s “CRE loan book shrank by $2.5 billion in the second quarter,” but doesn’t mention how fast was the growth to that point? What was the portfolio mix? Did they grow too fast and then decide they wanted to slow down?”

As a local example, so far in 2018, CrossFirst has originated over $500 million of non-owner occupied commercial real estate loans from the five markets it serves.  When bankers are reviewing a potential CRE loan, they consider a lot of factors: the subject market, the tenant mix and the project’s sponsor and operator, among other things.  But the most critical is the repayment capacity of the borrower. As Sims points out, “A property can double in value but it’s the cash flow off that property that’s going to repay your debt.”

So what about the folks considering a commercial real estate purchase or construction right now?   Sims says, “If you’ve got the ability to repay the loan and are operating within your budget, you can still find many banks that are willing to discuss that loan.”