in the second quarter from a year earlier. Meanwhile, the dollar volume of commercial/multifamily mortgage loans originated for Fannie Mae, Freddie Mac and commercial life insurance companies decreased in the same period.
Other reports have noted increased lending for residential and commercial construction projects as more banks of all sizes have entered the space. Fitch Ratings expects commercial construction activity will continue to be fueled by easing lending standards and improving industry fundamentals.
“Initially, the early movers jumped on the C&I lending wave, and there were probably a lot of opportunities there for banks,” Camp said. “As more lenders move to that, all of sudden there’s not as much opportunity, so banks may be saying, ‘Let’s back off and go back to the lending that we know, and the lending that we know and opportunities that have been there are in commercial real estate.’”
Commercial real estate loans as a percentage of total loans and leases at U.S. banks have slowly increased since 2008. These loans now make up 24.68% of portfolios, compared to 19.55% as of March 2008, according to data from Sageworks Bank Information, a web-based data platform. Construction and land development loans were 5.14% of total loans and leases in the June-ended quarter, down from 8.88% in March 2008.
Low demand for credit and fewer credit-worthy projects were the biggest challenges for banks in making commercial real estate loans, according to a survey released in April by the American Banking Association. But hard caps on commercial real estate lending imposed by regulators and other supervisory requirements were cited 22% of the time in the survey.
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Camp said that risk is an important factor for banks, which are under increased regulatory scrutiny and requirements to adequately stress test their commercial real estate portfolios.
“Banks have been burned before and regulators want to know, did they learn their lesson?” he said. “Even though confidence has come back significantly, I don’t think anyone’s 100% certain it won’t happen again.”
A recent report by the Real Estate Research Corporation (RERC) cautioned that increased demand for commercial real estate and competition for high-quality assets will cause asset prices to overtake their property values in certain sectors.
“The relationship between the value versus price of commercial real estate is precariously balanced,” said Ken Riggs, RERC president and CEO in a statement on the report.
“Our analysis
showed upward
pressure on pricing
without a
corresponding
increase in value,
and when this
happens, investors
may be forced to
accept lower returns
for assets with
added risk.”
Sageworks, a financial information company, collects and analyzes data on the performance of privately held companies and provides accounting and risk management solutions.