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CRE Finance World, Summer 2014

Banks Show New Appetite for Risk Table 3 Commercial Real Estate, Multifamily, and Construction Loans Held by Banks — Excluding Owner-Occupied Properties and Single-Family and Small Residential Construction; In Billions As banks and conduit lenders assert themselves in larger numbers, they are also working more aggressively to protect and grow their market shares. Lenders generally expect to ramp up their volume over the next year. That is good and bad. In some corners, lending is growing faster than borrower quality is improving, reinforcing that lenders’ risk tolerance is rising while their internal assessments of required reserves are falling. A far cry from the early recovery, borrowers attached to the right asset may now encounter pockets of saturation in the commercial real estate debt market. Where banks face heightened competition in making stabilized property loans to high quality sponsors, they are being compelled to revisit opportunities to fund development projects. Construction financing, which is earlier in its recovery cycle, remains a weakly contested segment of the market. That suits many banks CRE Finance World Summer 2014 54 just fine. Following a protracted drought in funding development projects, banks have now increased net construction lending on non-residential projects for three consecutive quarters. This reflects a slowly growing number of viable construction proposals, but it also results from pressures on stabilized lending. Bank Delinquency and Default Trends The default rate on commercial and apartment mortgages held by banks declined to 1.7% in the fourth quarter, the lowest level in five years. Excluding apartments, the commercial default rate fell to 1.9%, also at a five-year low. The apartment default rate, which had exceeded the commercial default rate at its peak four years ago, is now below 1%. Along its current trajectory, it will fall to within a long-term structural range centered about 0.5% by the end of 2014. Source: Chandan, FDIC, Bank Call Reports


CRE Finance World, Summer 2014
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