Pennsylvania real estate developers may be somewhat alarmed that loss rates on banks’ commercial real estate loans rose in the fourth quarter of 2015, according to a new report by Sageworks. Late last year, regulators announced that they would increase oversight of CRE lending activities by financial institutions after noting a loosening of underwriting standards.
A consultant for Sageworks said the cause of the loss rate uptick was unclear, but loss rates have seen fourth-quarter increases in six of the last eight years, and they are still much lower than they were in 2008. He also noted that charge-offs are at acceptable levels, cash flow is good and interest rates are low, which has fueled more CRE lending by banks.
In December, regulators issued a joint statement noting that they had observed an easing of CRE underwriting standards by banks, including less-restrictive loan covenants, interest-only payments, extended maturities and limited guarantor restrictions. They said that high CRE credit concentrations and weak risk management historically lead to an increased risk of loss and failure, and they would be more closely scrutinizing the CRE lending practices of financial institutions going forward. In March, the Office of the Comptroller of the Currency indicated that banks had been responsive to CRE initiatives, though no details were offered. First-quarter data is expected to be released soon.
The commercial real estate market is complex and subject to change. As the regulatory climate gets stricter, developers may want to work with their attorneys to find alternative sources of debt financing for their planned projects.
Source: Forbes, “Banks’ Loss Rates For Commercial Real Estate Have Risen,” Mary Biery, May 1, 2016