Rising interest rates and plenty of volatility have made May a tough month in the commercial real estate world.
But commercial real estate investors are like Tom Brady, the New England Patriots quarterback. Brady, who learned last week that he will be suspended in the wake of the NFL’s investigation into deflated footballs, had a tough month but still comes home to a beautiful house and wife and still possesses four Super Bowl rings.
Likewise, interest rates aren’t quite as good as last month, but they are still pretty darn good — and investors still are doing pretty darn well.
Despite rising interest rates, competition between lenders and different lending sources is fierce. Banks are swarming developers looking for deals to add to their books. As one developer quipped, “I could go to lunch every day of the month with a different lender if I had the time.” While banks are pushing hard for new business, permanent lenders are also trying to get loans booked and find themselves battling each other as well as banks.
Data compiled by Trepp Bank Navigator on the top 100 banks in the country, ranked by commercial real estate loan portfolios, tell the story for what went on in 2014. Overall, these banks grew their loan portfolios an average of 6.8 percent last year. Some of the very largest banks such as Bank of America, BB&T and Regions shrank a bit, while others like M&T Bank and SunTrust had healthy growth.
Wells Fargo, which is winding down its real estate lending office in Richmond, is the largest real estate lender in the country and grew its real estate holdings by a paltry 0.8 percent in 2014, according to the data. Union Bank had a surge in real estate holdings of 75.2 percent when compared with 2013. No doubt the astronomical loan growth was based in large part on its merger with Stellar One Bank. This brought Union’s real estate holdings to $3.01 billion at the end of 2014, ranking it the 76th largest on the list.
The list measures the loans made by banks for land purchases and new development. Development and land loans grew by 15.2 percent during 2014 for the top 100 banks. This growth is an important metric to watch as it marks a turn from most prior years in the recovery, when development and land loans were shrinking.
A study by Mary Ludgin, who is the director of global investment research at Heitman and will be speaking at the VCU Real Estate Trends Conference in October, showed what most banks have experienced in the past seven years. Development activity during this recovery has been tempered. Even though loan growth for development loans was positive in 2013 and strong in 2014, across the country, completions for retail, office and industrial properties are well below 20-year averages. Only apartment completions in 2014 exceeded the 20-year average.
This is a positive for lenders and real estate investors alike, as less supply will eventually mean rental growth and price appreciation as employment and population growth continue. Another positive for investors, but perhaps not so much for lenders, is low rates.
According to the John B. Levy & Company Mortgage Survey, commercial mortgage rates increased during the last month in a fairly significant way, but remain low. Five- and 10-year loans now range from 3.40 to 3.80 percent, respectively, for top-rated mortgages. Full leverage 10-year conduit loans are closer to 4.25 percent.
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