As an officer who confers with banks on a daily basis, Richard Walter, senior managing director of Promontory Interfinancial Network LLC and head of Bank Assetpoint, can provide borrowers with a view into the financial institutions’ worldview.
Banks of all sizes currently are experiencing a “big appetite for commercial real estate deals,” says Walter. “They all ask us, ‘what opportunities do you have?’” And distressed opportunities, he adds, is still available from banks.
Bank Assetpoint, which serves more than 1,300 participating banks in its network, provides a marketplace for banks and other institutions to buy and sell bank assets with one another. Assets exchanged include bank loans, loan participations, new originations and commercial real estate and most other types of assets on which banks make loans.
As far as the exchange of commercial real estate assets, the network hosted by Bank Assetpoint allows banks to purchase commercial property mortgages from one another. Some banks may not possess commercial property loan origination capabilities but would like to benefit from owning the mortgages on their balance sheets. Bank Assetpoint provides a marketplace for these banks to purchase mortgages from other banks that do have the capability to make those loans, and that would like to lighten their portfolios.
Banks today can also obtain a good arbitrage by selling their loans, as their costs are low, comments Walter. Indeed, he says, banks today are the lowest-cost provider of commercial property financing besides the agencies, Afterall, they are paying less than 1 percent on bank deposits. By contrast, the cost of funds for mortgage REITs, private REITs or hedge funds are relatively higher, and consequently these entities may require higher yields in their loan transactions compared to banks.
Financial institutions are also often the most flexible in their loan arrangements with borrowers compared to other capital sources especially CMBS, notes Walter. For example, on commercial properties, banks are willing to recapitalize properties. If a tenant should vacate the property, and there is room in the market for higher rents resulting from a property renovation, a bank may very well consider reconfiguring the loan for the borrower. A CMBS lender, by contrast, will be restricted in its ability to “redo” the loan since the loan is securitized.
As far as distressed properties, there still exists non-performing commercial real estate loans that banks would like to dispose of. Distressed inventory located in the core markets may be mostly bought up. However, depending on the geography, there are a lot of properties, for example in the Southeast, whose mortgages are still held by banks, Walter says.
A lot of banks have kept these portfolios through the Great Recession, and “they are now seeking to move what they can.” Further, given the rising loan maturities in the next three years, there may even be more distressed real estate assets that banks will be looking to sell off in the next few years, he adds.
Banks have also been expanding into making longer-term loans, of five, seven or even 10 years. There is a short supply of borrowers in the market relative to the supply of debt capital, suggests Walter. And as regards the commercial property sector as a whole, construction levels have not recovered fully, further constricting banks’ traditional lending market. Consequently, banks are diversifying into adjustable-interest longer-term loans because if they “choose not to be in the market for longer-term loans, they may lose opportunities,” explains Walter. “Banks we work with are very anxious to expand.”