Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
The Mortgage Bankers Association (MBA) recently reported another stellar year for commercial/multifamily mortgage originations in 2018. Although the MBA will release final data next month, results from its fourth quarter mortgage originations survey point to volume that could be 3% higher than the record $530 million reached in 2017.
Banks are facing more competition. Growth of non-bank lenders has added a whole new dimension to the competitive landscape, particularly in bridge and construction financing, notes Kathleen Farrell, executive vice president, line of business executive, commercial real estate, at SunTrust Banks. There are multiple bids on any opportunity or new project that needs construction financing. According to the MBA, GSEs and life companies increased loan originations by 16 percent and 10 percent respectively in 2018. Debt funds also saw a big jump of 29 percent from an estimated $52 billion in 2017 to $67 billion in 2018.
Counsel Mortgage Note: If you’re only looking at banks for your CRE mortgage financing, you’re limiting your market search. Bank lending actually took a drop of 10% in origination volume last year, while life insurance companies and debt funds increased volume 10% and 29% respectively.
Banks were riding good momentum coming into 2019, with Q4-18 mortgage originations up 5% year-over-year, according to the MBA. Although that increase is lower than the broader market, which saw an estimated 14% jump in mortgage originations during the last three months of 2018.
The core property types that are most in demand continue to be multifamily and industrial, followed by office, hotels and then retail. However, banks are exhibiting caution even for favored property types in markets that have seen high levels of construction. Lenders are drilling down to look at specific submarkets and micro-markets to determine if there are concerns about oversupply. Community and regional banks remain very active in commercial real estate lending; in some cases, more active than some of the national banks. In addition, community and regional banks are stepping out and doing larger and larger deals in terms of loan amounts.
One important backdrop for the current bank lending climate is that bank commercial and multifamily loans continue to perform extremely well. The delinquency rate for those bank loans that are 90+ days past due is near record a low of 0f .48 % as of Q3-18. Banks historically have had “measured confidence” about lending as long as their delinquency rate remained low, although to my mind this is like driving forward looking in the rear view mirror.
One of the notable trends to watch in the banking sector is that some banks are doing more long-term, fixed rate loans with 7 or 10-year terms for clients on a select basis. For example, SunTrust Banks started developing a permanent loan product about two years ago. SunTrust’s longer term fixed-rate loan product started to gain momentum in 2018, as interest rates began to rise. We might expect, however, that the Fed’s announced “patience” in continuing it’s previously announced 2019 rate increases will likely trigger a shift in borrower demand back to variable rate loans.
Looking ahead to 2019, banks could face more headwinds in construction financing due to the late stage of the cycle and rising costs. Banks have been pretty disciplined this cycle in maintaining their underwriting standards when they evaluate construction loans. As the cycle runs this year into 2020, expect underwriting criteria for construction projects to become more
strict and covenants more demanding.
On the positive side, however, there is still a lot of equity targeting CRE and what appears to be a steady transaction pipeline that will require financing.
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Michael Green is a Commercial Loan Originator for the Counsel Mortgage Group®, LLC.
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