Dive Brief:
- The Federal Reserve Board's latest senior loan officer opinion survey on bank lending practices indicate a loosening of U.S. bank commercial lending terms that hasn't been seen in almost three years.
- The April 2018 survey addressed household lending as well, but included five questions specific to commercial real estate (CRE). The study revealed that U.S. banks loosened lending policies, narrowed spreads and raised the maximum loan size for all three major categories of CRE loans over the past year. Foreign banks surveyed also reported relaxing their terms on all three major categories of CRE loans.
- A significant number of bank officers who responded that their institutions had eased lending standards responded that they did so in part because of "aggressive" competition from other banks and nonbank lenders. A willingness to accept more risk, relatively stable commercial real estate prices, vacancy rates, fundamentals and capitalization rates also played into the decision to loosen up commercial loan terms.
Dive Insight:
Nonbank lenders have provided a viable alternative for commercial developers for the last few years after banks left a door open when they tightened their standards. Eric Lemont, real estate partner at Sullivan & Worcester in Boston, told Construction Dive last year that uncertainty around new high volatility commercial real estate transaction (HVCRE) requirements was one of the reasons.
Construction loans fall under HVCRE rules, which require the lender to put aside 50% extra cash reserves, creating greater exposure for the lender. Lemont also said the CRE industry has been in a crest for quite some time, leading some lenders – and even investors – to ask how long it can last.
"Shadow banks," according to David Eyzenberg, president of real estate investment bank Eyzenberg & Co., such as debt funds and life insurance companies, have moved into the CRE space to take up the slack. Even though interest rates offered by these alternative lenders are typically higher, Eyzenberg told Construction Dive that they're not required to abide by traditional bank regulations, which allows them to assume greater risk and offer a higher rate of return for their investors.
In fact, even Related Cos., developer of the $25 billion Hudson Yards development in New York City, took advantage of a $475 million debt financing offer from Starwood Property Trust when the project was in its beginning stages, rather than finance through a traditional lender.
As long as there are big commercial property deals to be made, it's likely that the nonbank and traditional banking sectors will continue to fight it out over lucrative commercial projects.
