billion to $999 billion category and rose to $25.3 percent from 21.5 percent in the under $10 billion category. (It should be noted that as banks merge or change in asset size, they might change categories during the study.) This growth in commercial mortgage lending not only increased regional banks’ share of the overall bank market, but of their share of all commercial mortgage lending. Small and regional banks comprised 18 per- cent of all commercial mortgage lending in 2017, double their share in 2011 when total originations were much smaller, according to Real Capital Analytics. What’s driving the growth in commer- cial mortgage activity of regional and local banks? The product fills a need and it is expedient. Mortgages provide more yield than other investment products, and that looks even better on a risk-adjusted basis since loan defaults are less than 1 percent. Another factor is the availability of the business. Large banks have many more revenue sources, such as investment banking and wealth management. For small banks, mortgages are more readily available than consumer and industrial (C&I) business loans, and they usually come in larger chunks. That’s an important factor to banks looking for growth. Many local banks operate in rural areas so their increase in lending comes later in the eco- nomic cycle and increases as the economy begins a decline. What’s more, commercial mortgages are easier to source than loans to small businesses. Property owners put mortgage assignments up for bid, and banks can control volume based on how aggressively they bid. RISKS OF OVERHEATING? Banks’ lending freely makes for a liquid and healthy market – if loan underwriting remains disciplined. Bank commercial mortgage holdings rose as a share the overall economy in the run-up to the last fi- nancial crisis, so the current trend could be a worrying sign. On a broader level, some of
would have a signifi- cantly larger impact on regional and local banks than large institutions. Smaller banks don’t rise to the level of “too-big- to-fail,” but a downturn could create havoc in the industry. INTEREST RATE RISK Virtually all commer- cial mortgage holdings in banks’ portfolios were originated during a time of historically low interest rates, with fixed-rate loan cou- pons in the 4 percent range. If the Federal Reserve keeps in- creasing the federal funds rate, and interest rates increase as many expect, the gap between the banks cost of capital and yield on their invest- ments – the net interest margin – will shrink or disappear entirely. That would sharply reduce bank profits, which is a big reason they have invested so heavily in the segment.
portfolios and 26.3% of total assets. For money-center banks, commercial mortgages represent only 8.6% of loan books and 4.1% of assets. Few small banks undertake the type of sophisticated cross-product alloca- tion models that large institutions use to make sure they are not overexposed to a sector.
the risks involved with the growth in lend- ing of regional and local banks include: CONCENTRATION RISK Generally, the smaller the bank, the larger the concentration of commercial mort- gages. Banks with $10 billion to $99 billion in assets have 26.6% of loan portfolios in commercial mortgages and 18.2% of total assets. For banks smaller than $10 billion of assets, the concentration is 36.2% of loan
MATURITY RISK Banks have shown during this cycle an unusual willing- ness to originate fixed-rate loans and loans with maturities between five to 10 years and sometimes even Paul Fiorilla is the director of research at Yardi Matrix, a leading commercial real estate research and data platform tailored specifically to address the needs of the commercial market industry. Learn more at YardiMatrix.com. > Continued on :: PG 96
banks, 3.8 percent for the $100 billion to $999 billion category and 1.6 percent for the under $10 billion category. As a percentage of total assets, com- mercial mortgage holdings of $10 billion to $99 billion banks rose to 18.2 percent
at year-end 2017, up from 12.2 percent in 2012. Again, that was more growth than other categories of banks. During that time, holdings of $1 trillion banks rose to 4.1 percent from 3.6 percent, remained flat at 6.4 percent for banks in the $100
What that means is that a downturn in commercial real estate performance
50 | think realty magazine :: october 2018
thinkrealty . com | 51
Made with FlippingBook - professional solution for displaying marketing and sales documents online