Regional Banks Grow Their CRE Footprints

Following a number of regulatory rollbacks, small and large institutions look to grow their stakes in commercial real estate in a disciplined fashion.

Despite some first quarter tightening, banks should be seen by multifamily owners and developers as highly competitive financing sources in today’s market for multifamily assets. 

Regulatory changes have made it easier for small and regional banks to grow their CRE footprints and compete in real estate lending. Meanwhile, bankers are also increasingly seeking to forge closer and more expansive relationships with their borrowers. While not likely to dominate the long-term, fixed-rate mortgage market, banks will continue to be major players in new development and transitional value-add financing.

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According to the Mortgage Bankers Association, a record $574 billion of commercial real estate and multifamily mortgages were closed in 2018. Of that total, commercial bank and savings institutions made up the largest investor group, responsible for $174 billion. That activity surpassed, in order, the GSEs, CMBS, CDO and ABS issuers, life insurance companies and pension funds.

While less encumbered by regulation, banks are remaining disciplined, insisting on good sites, developers and underwriting parameters and offering liquidity to the bridge financing market for transitional assets. They are also vying with agencies and insurance companies to offer alternative fixed-rate balance sheet loans to multifamily operators. They’re “playing deeper” into the term lending space, said HFF Managing Director Josh Simon. 

Small Banks Less Encumbered

In 2018, S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, delivered regulatory relief to a range of banking institutions, in particular smaller banks. These provisions and other regulatory initiatives whittled back a number of the post-financial crisis Dodd-Frank regulations and enhanced small lenders’ ability to compete in the commercial real estate lending marketplace, according to Tom Kim, senior vice president for commercial and multifamily with the Mortgage Bankers Association.

“At this point, borrowers are beginning to see the mortgage trends are changing and seem to be thankful for even obtaining financing,” said Jim Angleton, president of Aegis FinServ Corp. Image courtesy of Fin Serv Corp.
At this point, borrowers are beginning to see the mortgage trends are changing and seem to be thankful for even obtaining financing,” said Jim Angleton, president of Aegis FinServ Corp. Image courtesy of Fin Serv Corp.

The act enables banks to take higher levels of potentially risky mortgage-lending activity without reporting the activity to regulators, loosens rules on regional and community and enables some large banks to escape the shackles of greater “too big to fail” government oversight.

In April, the Federal Reserve released results of a first quarter survey of banking activity over the past year. According to the Fed, banks reported tighter standards in the first quarter across three major CRE loan categories (construction and land development, nonfarm residential loans and multifamily loans). But in response to questions about their lending policies over the past year, banks—some of which cited increased competition from other capital sources as the reason–reported having eased standards for: maximum loan size, maximum loan maturity and interest rate spreads.  

In addition to slowly rising interest rates, however, bank borrowers today are finding the percentage of leverage has been lowered. As a result, most banks prefer seeing 25 percent equity or cash, rather than yesteryear’s 10 to 15 percent. Mortgage bankers and fund managers still offer full 20-year term, self-liquidating loans, but the rates are only fixed every five years.

At this point, borrowers are beginning to see the mortgage trends are changing and seem to be thankful for even obtaining financing,” said Jim Angleton, president of Aegis FinServ Corp. “Therefore, not too many complaints are made when it comes to terms and conditions.”

Relationship-Driven

Increasingly, banks are seeking to forge closer customer relationships that go beyond simply originating a loan. By redoubling efforts to get to know their borrowers and those borrowers’ businesses, banks mitigate risk and enhance business opportunities.  

With deeper relationships, the bank may provide waivers and not require provisions it  would with newer relationships,” said Dave Borsos, vice president for capital markets with the National Multifamily Housing Council. “It’s not just loan growth for the sake of originating loans. That may have been the climate several years ago. But today, banks are saying, ‘We’re deploying capital, let’s make sure we know who our customers are, so we can identify our best customers and make capital available to them first.’ Also, banks are masters at cross-selling. They’re asking, ‘What other products and services from the bank can I sell these customers?’”

“The need to recycle capital over time will prevent banks from commanding a significant share relative to long-term, fixed-rate mortgages,” said David Shillington, president of Marcus & Millichap Capital Corp. Image courtesy of Marcus & Millichap
The need to recycle capital over time will prevent banks from commanding a significant share relative to long-term, fixed-rate mortgages,” said David Shillington, president of Marcus & Millichap Capital Corp. Image courtesy of Marcus & Millichap

Intermediate-term debt has become more prevalent with increased concerns over market volatility, said David Shillington, president of Marcus & Millichap Capital Corporation. Personal recourse is far more prevalent in this sector given the increased risks at the property level.

Once construction or renovation has been completed and the property has achieved a stabilized level of operations, most larger banks are looking to be repaid via a long-term execution,” he said. “Life insurance companies, Fannie Mae and Freddie Mac often provide the longer-term loans that repay the interim bank debt.”

While continuing to dominate financing of new development projects and transitional, value-add properties, banks have become increasingly aggressive relative to the financing of stabilized assets on the balance sheet, given the favorable risk and reward equation and the need for earning assets, Shillington addded.

Another key trend is that long-term, fully-amortized loans from mortgage bankers and banks can no longer be obtained, according to Angleton. HUD 202 or 212 programs offer up to 50-year financing but apply terms so harsh owners tend to think twice. Many commercial banks do provide up to 20-year amortization, but fix the rate for five years and then reset the rate for another five years. “The maturity is set for up to 10 years, and a balloon principal amount becomes due and payable,” he said.

Source: Mortgage Bankers Association
Source: Mortgage Bankers Association

The future

Banks continue to dominate the financing of new development projects and transitional, value-add properties. But the need to recycle capital over time will prevent banks from commanding a significant share relative to long-term, fixed-rate mortgages, Shillington said.

Debt is now and will continue to be the critical piece in making deals. Instead of plowing 20 percent equity into a deal and financing the rest through a bank, buyers and sellers are attempting to make deals more appealing. Mantis has talked with sellers who have locked in interest rates below current levels and are convinced buyers will find a loan assumption attractive. He’s also heard from buyers willing to pay up if the seller will okay providing them financing. Some consider the option, but most won’t, he said.

But, thanks to current demographic trends that favor apartment living, multifamily lending and borrowing is likely to continue at a healthy pace with small and regional lenders remaining active participants as they look to grow their CRE footprints, Kim said.

Read the June 2019 issue of MHN.