US Comptroller Flags CRE Lending

More than 400 US banks saw CRE loan portfolios grow more than 50% over the past three years, said Curry.

WASHINGTON, DC—Following on an interagency statement this past December that raised concerns about rising concentrations and looser underwriting standards for commercial real estate loans, the US Comptroller of the Currency said this week that he’s keeping a closer eye on CRE lending. Comptroller Thomas Curry delivered his comments in connection with the Office of the Comptroller of the Currency’s release of its Semiannual Risk Perspective for Spring 2016 on Monday. In prepared remarks, Curry cited real estate lending, along with commercial and industrial loans, as a year-over-year growth driver for the federally chartered banking sector. He said that as this stage of the cycle, we’re seeing “strong loan growth combined with easing underwriting to result in increased credit risk. While leveraged lending and auto lending remain concerns, CRE lending and concentration risk management has become an area of emphasis for regulators.” CRE portfolios—defined by OCC as the sum of construction, nonresidential mortgage, multifamily and residential mortgage lending—have seen rapid growth, especially among small banks, said Curry. At the end of last year, 406 banks had CRE portfolios that had grown more than 50% in the prior three years, compared to just 291 four quarters ago. In particular, over 180 of the 406 banks more than doubled their CRE portfolios over the preceding three years. “At the same time we are seeing this high growth, our exams found looser underwriting standards with less-restrictive covenants, extended maturities, longer interest-only periods, limited guarantor requirements and deficient-stress testing practices,” Curry said. In general, banks of all sizes experienced stronger loan growth in 2015, led by banks with assets of between $1 billion and $10 billion, according to the OCC report. CRE lending drove growth in these banks, as it did for lenders with less than $1 billion in assets. Overall, CRE loans increased more than 13% in ’15, following a 7.4% increase in 2014 as banks exhibited a strong risk appetite for this type of lending, the report states. The potential for risk increases when, as the OCC report states, the pace of growth in CRE property values is forecast to slow. “ In the past two years, strong market fundamentals and low interest rates made CRE a relatively attractive investment, especially for foreign investors with limited prospects in their home markets; in response, investors rapidly bid up property prices, particularly in major US markets most attractive to foreign investors,” the report states. “In the next two years, higher interest rates will raise borrowing costs for both domestic and foreign investors and could dampen the pace of price growth for commercial properties.” Apartments are at a more advanced stage of the vacancy rate cycle than other commercial property types, according to OCC’s report, and accordingly could see rising vacancy rates sooner. Due to “booming new apartment construction,” the national vacancy rate for multifamily, which fluctuated within a narrow range in the past two years, is expected to increase by nearly one percentage point over the next two years. Markets with the highest volume of new construction will likely see apartment vacancy rates rise by more than 1% and will experience slower growth in rents and NOI, the report states. “Construction of other types of commercial properties has been, and is likely to remain, more limited,” according to the OCC report. “Consequently, the national vacancy rates for office, industrial and retail space declined steadily in the past two years and, unlike apartments, are expected to decline further in the next two years.”