By Paul Fiorilla
Director of Research, Yardi Matrix
The post-financial crisis expansion has been a heady time for banks involved in commercial real estate. As of December 2017, banks held $1.8 trillion of commercial and multifamily mortgages, up nearly $500 billion (37.4%) since the recovery began in earnest in 2012 and 50% more than the $1.2 trillion banks held 10 years ago at the height of the last lending boom. Growth was highest in 2015 and 2016, when commercial mortgage holdings grew a combined $258 billion, or an average growth of more than 8% annually.
A recent study of the commercial mortgage industry illustrated some key trends:
- Since 2012, commercial and multifamily mortgage holdings of the nation’s 5,300 banks have grown by 37.3% to $1.8 trillion;
- This growth has been driven by banks searching for higher-yielding investments, the stellar performance of the sector, strong borrower demand and weak volume in other lending products;
- Regional and local banks are the fastest-growing segment of the commercial bank sector. In recent years, the largest growth in commercial mortgage portfolios on both an absolute and percentage change basis has come from banks with total assets of less than $100 billion. The largest banks are also increasing commercial mortgage holdings, but more incrementally;
- Banks with less than $100 billion in assets—which encompass more than 97% of the sector – on average devote a much larger percentage of their assets and total loan books to commercial real estate than larger banks.
Because property values are rising much faster than the economy—values are more than 50% above the 2007 peak, per various indexes—bank mortgage holdings are growing as a share of gross domestic product. As of Q4 2017, commercial and multifamily loans represented 10.3% of U.S. GDP, up from 8.4% in 2011 and 7.9% in 2007. The growth reflects the extent to which commercial property values have risen, in large part due to strong capital markets forces.
Growth in mortgage lending reflects commercial real estate’s position as a favored asset class among investors, both equity and debt, during the current economic cycle. Strong demand for space in most segments has led to increasing property income, while attractive returns have brought a great deal of institutional capital into the sector.
Banks’ lending freely makes for a liquid and healthy market—as long as loan underwriting follows a disciplined process. Maintaining this discipline requires basing decisions on complete and reliable data. That’s why many underwriters take the guesswork and uncertainty out of underwriting by adopting new business development tools that automatically compile rent mix comps, sales and debt information, rent and occupancy forecasts by location and property type, submarket data, new construction and other information.
Reliable information in the property prospecting, underwriting and asset management processes results in less-risky loans. That enables portfolio managers to deliver the returns their investors expect and helps this crucial segment of the economy continue to prosper.