There are lots of reasons that have made real estate lending a risky business especially for the banks. According to a recent report it is seen that the banks typically are holding more real estate debt currently as they used to before. As off now, the commercial real estate lenders have their hands full after the recession.
According to a new report of real estate data firm CrediFi it is seen that:
- The US real estate lenders have face much larger risk exposure than those who are publicly recognized
- In the commercial real estate sector the exposure of the lenders is far riskier as compared to the retail and the industrial property sectors in particular
- Along with that the declining Commercial Mortgage-Backed Securities or CMBS originations also pose much threat to the balance sheets of the lenders.
According to the report of CrediFi and after going through and analyzing a whole lot of lending reviews it is found that there were more than $925 billion of commercial real estate loan originations in 2018. This is the figure that actually exceeds the approximate $574 billion in new loans originations last year that was documented and reported by another established industry group, The Mortgage Bankers Association or MBA.
Describing the real estate data
When you consider the real estate data startup you will see that the facts and figures documented by the MBA as “incomplete and misleading” are primarily based on the more granular loan-level data. These cover a wider band of the commercial real estate lending market. That data shows that:
- Both banks and non-banking finance lenders have troubling exposure in particular to specific sectors that are typically termed as ‘at-risk’ sectors such as the retail and industrial sector lending.
- On the other hand, the CrediFi report tells that the new loan originations on the industrial and retail properties in total surpassed $250 billion in previous year which is in contrast of the data provided by the MBA which says it is less than $150 billion.
However, CrediFi states that it underestimates the exposure to risks of the lenders in times of an economic downturn in industrial production and consumer spending. They say that these are the two specific segments that are very sensitive to the economy and its nature and therefore will respond significantly in an event of an economic downturn.
The significance of the data
The data signifies one specific thing that is: an economic downturn is coming which is even echoed by several other research companies. All these reports suggest a more or less 4% decline in the real estate lending volumes in last year which is much in accordance to the CrediFi data.
This also indicates that the banks and other commercial real estate lenders have started to pull back amidst their concerns about an additional level of risk in the real estate lending market scenario. Industry experts say that:
- Real estate lending market is an extremely long economic cycle that is the backbone of the nation and
- If there is a sign of an economic downturn is coming sooner rather than later, it is imminent that there will be a lot of risk exposure for the real estate lending.
However, Jamie Woodwell, the vice president of research and economics of MBA disputes such findings of the CrediFi that suggests there are more risks in the commercial real estate lending market than documented. He is of the view that it is the incredible transparency into the real estate debt held by the banks through disclosures by the Federal Reserve and the Federal Deposit Insurance Corporation, FDIC as well as the multifamily and commercial mortgage delinquency rates that are typically at the lowest levels in history.
Nevertheless, Woodwell acknowledges the fact that:
- Both the MBA and CrediFi considers the commercial real estate loan data while measuring different things and tracking the trends
- The MBA focuses its research on mainly the financing aspects of the income producing properties that are typically leased from one party to the other
- They have abjured all data available on the real estate that are typically occupied by the owner especially the ones most businesses typically use as collateral for any Commercial and Industrial loans that are found to have been factored into the CrediFi report.
However, the methodology followed by MBA is defended noting the fact that their data focuses on the major lenders only. They typically used a dedicated commercial real estate platform for their assessment and analyzing needs for the majority of the financing volume of the real estate market.
Facing the headwinds
The retail sector faces the headwinds and this fact is significantly noticed in the recent years. The primary reason to this is the rise of online retail. This is in fact hurting everyone including the ‘mom and pop’ stores to the major national chains in turn.
- It is the retail landlords who are facing increasing vacancies that have reduced their cash flows
- It has made very hard for them to pay off the debts on their properties and
- It has created a superfluity of shopping centers and malls all across the country.
All these factors have resulted in a greater exposure to retail even for the largest lenders in this sector. This signifies that the current retail loans on the books of the banks will not look very good very soon as the entire market is expected to witness some distress.
One the other hand, when it comes to industrial real estate, it has proved to be the most demanding sectors in the commercial real estate setting. These are dynamically fueled by the same e-commerce companies which in many cases have confounded the brick-and-mortar retail sector since its emergence.
The investors and debt lenders both are flocking to the industrial sector because these companies now need more space than before for their warehousing and distribution purposes. This has resulted in the growth of industrial property loans by 73% by dollar volume. Considering the current real estate lending perspectives a fundamental explosion in demand is expected.