The nation’s largest banks are being more cautious with their commercial real estate lending, based on what they are saying on their earnings conference calls.
The same headwinds that slowed bank lending last year are extending into 2019, as economists debate how much longer the current economic expansion, on pace to reach a record stretch in July unless the effects of the government shutdown stop it sooner, can continue. Interest rates are projected to keep going up and institutions face stiff competition for deals from non-bank lenders.
Additionally, borrowers are prepaying loans sooner as properties trade hands, slowing the growth of loans on bank books.
Marianne Lake, CFO at JPMorgan Chase & Co., reported commercial real estate loans were up 2% in the Q4-18, less than its recent pace of about 3.9%, according to data from the FDIC. That was below the industry average of 4.5%.
“In mature markets we’re again being pretty prudent,” Lake said. “I won’t call it tightening, but being very selective.”
Lake added the bank is “tightening” construction lending.
“We’re going to protect profitability and credit discipline over growth at this point,” she said.
As of September 2018, JPMorgan Chase was the second-largest holder among U.S. banks of commercial real estate loans with $119 billion. Only Wells Fargo & Co. with $132 billion topped it.
Wells Fargo gave a similar outlook as JPMorgan for 2019.
“Commercial real estate loans were down $583 million from the third quarter and it declined for seven consecutive quarters, reflecting continued credit discipline and competition in the highly liquid markets and pay downs of existing and acquired loans,” reported John Shrewsberry, Wells Fargo’s CFO. “We anticipate these market factors will continue to impact portfolio balances in the near term.”
The Federal Reserve Board’s latest Beige Book, an anecdotal look at conditions around the country, suggests a better lending outlook from smaller banks, which reported steady demand for commercial mortgages.
Commercial real estate loan losses are still minimal, as underlying fundamentals remain strong.
The Mortgage Bankers Association is reporting it expects another strong year of loan originations.
“Mortgage bankers look to 2019 as another strong year for the commercial and multifamily mortgage markets,” said Jamie Woodwell, MBA’s vice president of research and economics. “The majority of top firms expect that ‘strong’ appetites from both lenders and borrowers will drive commercial mortgage originations higher.”
Mixed messages? To be sure. If the top 2 mortgage lenders reduce their appetites for CRE mortgage lending, that leaves a notably large gap to fill to meet demand. Smaller banks, be they community or regional, are more niche oriented than the larger money center banks who address the market with a broader brush. We all know WF, BofA and Chase, but who knows the Bank of Hemet and what their sweet spot is? (besides Counsel Mortgage) Competition will heat up for the remaining players in the market, and terms and conditions will have more “live fields”.
It’s shaping up to be a hectic year, but that can also mean profitability for those who can navigate the terrain. Markets hate uncertainty – it forces many participants to the sidelines. And in the meantime opportunities pass. If you’re going to stay in the game, we suggest you not go it alone. Find a skilled and trusted ally who will work in your interests, not the lenders. If this is you, we suggest you give us a call.
For specific representation, give us a call at Counsel Mortgage.
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Michael Green is a Commercial Loan Originator for the Counsel Mortgage Group®, LLC.
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