Community Banks Say, ‘CRE Crisis? What Crisis?’
Main Street institutions say their loans have been to buildings in use, not largely empty office towers.
For the length of the CRE loan crisis, there’s been a basic question of whether smaller banks have precisely the same challenges facing regional and large institutions. Community banks are speaking up more, arguing that they don’t have exposure to the most dangerous commercial real estate.
“The focus has been on office as that is the weak category,” said John Buran, the chief executive officer of Flushing Financial, told the New York Times. “Most community banks don’t have the type of exposure.”
The discussion comes down to the setting in which different banks work. The big ones— those with $100 billion or more in assets — work on big projects. As is true of some other types of investing, such as venture capital, the banks have a lot of capital they must put to use on behalf of their investors. Each project like a loan has a cost to process and undertake due diligence. The process is expensive, there are only so many hours in the day, and there must be a high enough return to justify the effort. The loans they consider are larger, where the investments and stakes are higher.
Hence, a heavy dose of office towers, where there is a bifurcated market. There is a gap between Class A properties and Class B and C ones. As GlobeSt.com has previously reported, the upper end of office markets, maybe 10% to 15% of all office properties, tend to be in much better shape, with lower vacancies and higher rents. The lower end — 85% to 90% of all offices — is where the pain exists.
Community banks typically work close to hand with smaller properties locally occupied. These financial institutions aren’t concentrated on big bets and put money into what makes local economies tick. According to Flushing’s Buran, his bank’s CRE portfolio was only 4% office. Instead, 38% of the loans are to multifamily owners, where people have to live.
Nathan Stovall, director of financial institutions research for S&P Global Market Intelligence, told the Times that community banks are recognized for their prudence. “You are having a lot of investors with a shoot-first mentality,” he said. “Not all commercial real estate is created equal.”
That isn’t to say all community banks are safe and sound. Philadelphia-based Republic First Bancorp failed in a similar way to First Republic Bank, Silicon Valley Bank, and Signature Bank, which went under last year. CRE lending wasn’t the issue. Instead, it was the falling value of the banks’ investments.
However, the rumors of their demise are greatly exaggerated.