But in Current Competitive Environment, Other Banks Still Cutting Deals
By: Mark Heschmeyer
Posted: July 29, 2015
Even though the Fed today signaled that it remains on course to raise interest rates in September or later this year, a few banks have already begun raising interest pricing on their commercial real estate loans, particularly for multifamily property. While long expected given the overall strength of the economy, the bump in pricing is coming weeks in advance of an expected hike in the Federal Reserve Bank lending rate.
“We’ve seen rates increase, both on the Treasuries and on swaps, and we’ve seen the increase being sustained and we’ve been wanting to raise interest rates for the last several weeks,” said Joseph DePaolo, president and CEO of Signature Bank.
However, DePaolo said his bank wasn’t able to raise rates in the second quarter because their competition wasn’t moving.
“You can’t be a half or more [percentage points] higher because no matter how much they want you and no matter how efficient our commercial real estate team is, half is a half, and it means a lot,” he said, noting the highly competitive lending environment.
But that has changed in the last 10 days.
“We did some due diligence last week and again yesterday (July 20) and found that our competitors were raising their five-year fixed from let’s say as low as 3% to 3.25%,” DePaolo said. “We were 3% and we simply raised ours to 3.5% and that was yesterday.”
While all the signs appear to point to interest rates finally moving up after many previous fals starts, not everyone is convinced that higher rates will finally take hold.
“That’s possible, but there’s no guarantee,” said Peter Ho, chairman, president and CEO of Bank of Hawaii. “We have seen these [trends] in the past, where it sure looks like rates are moving up and margins stabilized only to find out that, it’s not really a trend, it’s an aberration. So it’s definitely possible, but as I said, I just can’t guarantee that.”
With the expected change in rates, Stephen Gordon, chairman, president and CEO of Opus Bank in Irvine, CA, said his bank has been cutting back on multifamily lending, reducing its multifamily loans in its portfolio from 59% of its holdings to 53% this past quarter.
However, while certain banks have begun the shift to more costly money, the improving economy has banks competing intensely for borrowers as they return to market. As a result, aggressive competition for commercial real estate lending is continuing across much of the country.
“In my opinion [lending competition] remains brutal,” said Mark Hoppe, president, CEO of MB Financial Bank in Chicago.
That is particularly true in CRE lending, Hoppe noted. Loan to values are clearly going up and the bank is seeing more relaxation in the amount of guarantees required in some deals.
“We understand that this is the world we live in, a very competitive one, and we’re going to compete on every front but do it where we think it makes sense,” Hoppe said.
CRE Borrowing Moving Beyond Major Metros
René Jones, chief financial officer of M&T Bank, noted a significant shift in CRE lending patterns. In previous quarters, most of the lending growth in M&T’s markets were primarily around the New York City metro area. That’s not the case this past quarter.
“Right now, growth is everywhere,” Jones said.
Total loans in upstate and western New York, were up 4%. In metropolitan New York and Philadelphia, up 8%; in Pennsylvania, up 12%; in Baltimore, up 7%; and in its other regions, loan growth went up 5%.
Other CRE lending trends noted among the nation’s major banks emerged from mid-year earnings conference calls. Highlights follow:
The Eyes on Texas
“The Eyes of Texas” is the school spirit song of the University of Texas at Austin and the University of Texas at El Paso, but from an economic and CRE standpoint all eyes have been on just Houston for the last three quarters. With energy prices not rebounding much from their 2014 collapse, there has been a lot of concern about how Houston multifamily and office properties will hold up.
Although lenders are seeing some softness in the market, second quarter results appear to be muted.
“Our office construction portfolio is very modest in size. And the office term loan portfolio is performing well there,” said Scott J. McLean, president and COO of Zions Bancorp in Salt Lake City. “On the multifamily piece, we’ve had about five, six multifamily transactions that have come out of the construction period and they’re achieving rents that are actually above the pro formas. But clearly, there will be softness there for office and there will be softness in multifamily, but we think our real estate portfolio is about $1.5 billion less going into this downturn than it was going into the 2009 downturn,” McLean said.
However, McLean likes the overall direction of the Houston economy. While job growth won’t be the 80,000 to 100,000 new jobs it has averaged over the last couple of years, McLean said the market could see 10,000 to 20,000 new jobs this year and about 30,000 new housing starts.
“Sure Houston continues to be a dynamic market,” said Keith Cargill, president, CEO of Texas Capital Bancshares, but “there is no change in our view that we will see muted growth in CRE.”
“We know we are early relative to what appears to be still a very healthy market really in all categories. Our multifamily is still extremely strong. Even in our Houston market where we have some projects, I had some concern about six or eight months ago. They are holding up quite nicely and as they complete they seem to be hitting pro forma rates or better. And so we hope that continues,” Cargill said.
“We just believe strongly that you can have too much of a good thing in terms of concentration risk,” he added. “And while today [CRE, building and energy] are three of the healthiest businesses we have, they have more cyclical risk in a down cycle. And that’s the only reason that we are tamping down the growth rate.”
Lending for the Long-Term, Borrowing for the Short-Term
Rapidly escalating CRE prices are a mixed bag for banks. On the one hand, they create demand for loans. Banks are pricing those loans based generally on 10-year payback periods. But with the run-up in CRE values stretching into its fifth year, borrowers are flipping investments much more quickly than that.
Loan prepays are definitely on the high side, said Russ Colombo, president and CEO Bank of Marin in Marin County, CA.
“There is a fair amount of profit-taking going on,” Colombo said.
Link to article: Fed Move