Big Banks Are Backing Away From Commercial Real Estate

Commercial real estate lending increased by $26.4B in Q1, but research shows the nation's largest 25 institutions are beginning to back away from the market.

According to Federal Reserve data, total CRE loans on bank books increased during the first quarter to $2.1 trillion. However, in the aggregate, the 25 largest banks in the United States saw their commercial real estate loan exposure drop about an annualized 1% during Q1.

The rest of the nation's banks, considered collectively, grew their commercial real estate loan portfolios by an annualized 7% during Q1.

All together, the 25 largest banks account for one-third of commercial real estate loans outstanding. 

There are a number of reasons for big bank reticence when it comes to commercial real estate, CoStar reports. One is that the real estate cycle has gone on for longer than many bankers feel comfortable with.

Also, commercial property pricing has become too high in the estimation of some lenders. That has driven deal volume down somewhat as investors become more cautious, lessening the demand for loans.

Much of the recent lending volume has also been in the form of refinancing as owners seek to take advantage of a historically low-interest-rate environment. As rates go up, that volume of refi is going down.

Finally, CRE lending is not quite as lucrative as it once was. Demand for loans has softened somewhat, CoStar reports, meaning more lenders are chasing fewer deals. That has compressed loan prices, taking away some of the incentive to make commercial real estate loans.