Competition for CRE Lending Creating a Dilemma for Banks







“If you are out to describe the truth, leave elegance to the tailor.”
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Lenders Still Prefer Stabilized Properties, but Nonresidential Construction Lending Also Targeted

CoStarBy Mark Heschmeyer October 29, 2014

The nation’s banks continue to grow theircommercial real estate loan portfolios, increasingly betting on the growing demand for new commercial property construction and continued strength in multifamily.

However, as many banks acknowledge in their quarterly earnings discussions this month, the lending landscape is getting pretty crowded with competitors. That is prompting some banks to back away from opportunities and others to stretch their lending covenants.

“We’re seeing in a lot of markets, particularly in the construction side, [where it’s] a very competitive business,” said Todd Clossin, president and CEO of WesBanco.Inc., a multi-state, bank holding company based in Wheeling, West Virginia. “You’re seeing spreads come down in that area.”

“We tend to be pretty disciplined — we’ve seen a lot of opportunities below 200 basis points spread on the construction side that we passed on. We haven’t done those,” Clossin added. “We’ve been able to stay disciplined and show growth as a result of that.”

And that’s just the point of the current state of CRE financing: demand is such that banks can afford to back away from deals and still boost their portfolio totals.

Lending for all property types is looking good according to bankers. Apartments, retail, offices and lodging borrowers getting lines of credit and using them for property acquisitions. That is particularly true for stabilized properties, bankers reported.

Dunson Cheng, chairman, president and CEO of Cathay General Bancorp, the holding company for California-based Cathay Bank, said as some of the CRE loans on its books are getting paid off by borrowers who have been refinanced by competing banks, it has been able to replenish its books with newer loans.

“We are experiencing quite a bit of competition on the CRE loans. And in the third quarter we saw a higher pay-off on CRE loan as some of the existing loans are being let go because of pricing,” Cheng said. “On the other hand we were still able to increase our CRE portfolio quite substantially.”

Roger Busse, president and COO of Pacific Continental Corp., parent of Pacific Continental Bank in Oregon and Washington, said commercial construction funding will continue to grow in the coming quarter.

“The resurgence in quality commercial real estate construction projects… in our view is the sign of an improving economy and Pacific Continental is carefully expanding this segment focused to course on quality first followed by profitability and then growth,” Busse said.
Construction, Multifamily Lending Has its Skeptics
While many bankers reported that they still expected strong multifamily growth in the fourth quarter, others are starting to back off.

“We are not in a position where we have to follow what the other banks are doing,” said Robert Sarver, chairman and CEO of Western Alliance Bancorporation with bank operations in Arizona and Nevada. “We are in a position where we are able to walk away from over 80% of our credit opportunities in some of these areas.”

As an example, Sarver said they are backing off a lot of the multifamily real estate right now because “it is getting overbuilt a little bit.”

On the East Coast, Joseph Savage, president of Webster Financial with branches in Connecticut, Massachusetts, Rhode Island and Westchester County, NY, is seeing the same conditions.

“We can’t get yield spreads and return on capital that we want,” Savage said of multifamily. “We still like the multifamily. There is just not lot geography to get to play with.”

As many banks continue to peck away for the deals with the best yields, others are still chasing customers. That is not a scenario John Kanas, chairman, president and CEO of BankUnited wants to be involved in. With banks in Florida and New York, Kanas said he is seeing some lenders drop below 3% margins on loans; while most banks are reporting that most CRE loan margins are still hovering around 4%.

“We’re just not going to play some of those games that other people willing to do,” Kanas said. “While it will make you all happy right now, we don’t think you will like the long-term results of that. We think that when you start doing that, you’re not leaving a lot of room for mistakes in the future. People are under pricing and beginning to scale back on loan covenants, and it’s a dangerous game.”

“I mean we’ve seen some ridiculous bidding on loans,” he added. “People are extending longer than we’d like to extend. Multifamily for example, I think 92% loans we booked this year are under five years. And a lot of guys are going out much further and fixing rates much further.”

“I have seen this show before. I don’t think that’s the smart thing to be doing right now,” Kanas said.




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