Is CRE lending bouncing back?

Strong liquidity is fueling a growing appetite to finance commercial real estate (CRE) loans. Still, community banks are proceeding cautiously in the midst of lingering risks and uncertainty about some property types.

The pandemic caused many banks to tap the brakes on CRE lending. Those who stayed active were able to capitalize on opportunities to grow their CRE lending and forge new client relationships with borrowers who were hungry for capital. That was certainly the case with $9 billion-asset Veritex Community Bank in Dallas, which originated about $1.5 billion in CRE loans in 2020.

“We are very bullish on the opportunities and prospects we see [in Texas] and in the community bank space. So, we anticipate another strong year.”

—Jeffrey Kesler, Veritex Community Bank

“We had strong loan growth in [Q4 2020], and that momentum carried over into first quarter 2021,” says Jeffrey Kesler, senior executive vice president and president of the community bank’s Dallas and Fort Worth market.

Like many lenders, Veritex Community Bank’s primary focus is financing industrial and multifamily projects, which have been two of the most resilient categories throughout the pandemic. The bank is also an active lender for self-storage projects, and it continues to look at office and some retail assets, such as grocery-anchored centers and triple net lease properties.

“We are very bullish on the opportunities and prospects we see here in the state of Texas and in the community bank space,” Kesler says. “So, we anticipate another strong year in 2021.”

Some of that demand is coming from development projects that were tabled in 2020. At the same time, Veritex Community Bank is bracing for more competition as more banks resume CRE lending, putting pressure on loan pricing.

Liquidity drives appetite for CRE

“The overriding theme with community banks is that they are awash with deposits because of all the stimulus payments,” says Christopher Cole, ICBA’s executive vice president and senior regulatory counsel.

Many banks have been active issuing Paycheck Protection Program (PPP) loans, which are typically classified as commercial or commercial and industrial (C&I) loans. So, there’s good liquidity and room on balance sheets to finance CRE loans, but demand for loans has shrunk, Cole adds.

Demand for capital to finance acquisitions and construction has been improving in 2021, but early data reveal that it’s still trailing its robust pre-pandemic pace. According to commercial property services provider CoStar Group in Washington, D.C., an estimated 14,125 commercial and multifamily properties traded during the 12-month period that ended February 2021, which marked the lowest point since April 2013. The 12-month total represents a decline of more than 20% from the 12-month period that ended in February 2020.

However, many experts have a more positive outlook for CRE lending in the second half of 2021. Federal Reserve chairman Jerome Powell is among those who expect economic and job growth to grow more quickly as the percentage of the population that’s vaccinated continues to rise.

“As the economy starts to really pick up in the second, third and fourth quarters, we will see CRE demand increase,” Cole says. Potentially, that demand could even bounce back to strong pre-pandemic levels, he adds.

Brace for increased competition

Near-term CRE lending strategies are going to depend heavily on how a bank’s existing loan portfolio has weathered stresses caused by the pandemic. For some lenders, there’s still some mystery to the outlook on how existing loans are going to perform and what credit drift has occurred within their loan portfolios, says William Rowley, manager, underwriting solutions, market analytics at CoStar Group. “That is really going to determine the appetite for additional lending,” he adds.

Conservative underwriting has paid off for Houston-based Cadence Bank. The $18.8 billion-asset community bank saw steady performance in its existing loan portfolio in the past year, which helped the bank accomplish a record year of CRE lending volume in 2020. Cadence Bank, whose loans for projects average between $20 million and $25 million, expects to see more good lending opportunities ahead.

“Coming into the other side of the pandemic, people are optimistic, and that is translating to a lot of loan opportunities for us, as well as increased competition from other lenders,” says Tim Williamson, the community bank’s executive vice president of commercial real estate.

Both lenders and borrowers are returning to the market. “The supply and demand for commercial real estate lending, on both sides, has fully opened back up,” Williamson says. “There is an enormous amount of liquidity in the banking system and interest in lending to commercial real estate, and then there are a lot of developers that are excited about job growth and population growth and the expected continued opening up of the economy.”

Borrower demand could continue to accelerate more rapidly in the second half of 2021 along with the strengthening economy. Recovery after a worldwide public health crisis could look much different than that after the Great Recession.

“Commercial real estate metrics pre-COVID were really strong in comparison with the last financial crisis, which was caused really by loose underwriting standards and aggressive lending across the board,” Rowley says. “So, the impact to the commercial real estate industry is vastly different.”

Regulators have been more accommodating than they were in 2009 to 2011, allowing banks to work with troubled debt borrowers on solutions and not requiring them to set aside reserves and mark down loans right away, Cole says. “The question is whether they will continue to be accommodating,” he adds.