Small banks are retreating from financing commercial real estate as federal regulators ramp up scrutiny of such lending.
The Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency have repeatedly issued warnings to commercial real estate lenders, urging banks to strengthen loan terms. As a result, smaller banks are selling off loans and hesitant to issue new ones, leaving private equity funds and other institutional lenders to fill in the gaps, the New York Times reported. JLL’s Aaron Appel told the Times that there’s less competition now for $5 million to $10 million commercial property deals, especially for loans involving construction or redevelopment projects.
Large banks are also pulling back, since they can’t count on selling off portions of large loans to smaller banks. Instead, Michael Gigliotti, a broker for HFF, told the newspaper, property owners are turning to foreign banks. According to the Federal Reserve, American offices of foreign banks now have $51.8 billion in commercial mortgage holdings, a 56 percent increase from last year. For example, a group of foreign banks — led by Bank of China and Deutsche Bank — provided a $1.5 billion construction loan to Related Cos. and Oxford Properties Group for the Shops & Restaurants at Hudson Yards.
In some cases, banks are also teaming up with mezzanine lenders to speed up and simplify deals.
Arkansas-based Bank of the Ozarks seems to be one smaller bank that’s bucking the trend. As one of the most active construction lenders, its New York City real estate loans swelled to $1.9 billion in the second quarter from $1.6 billion at the end of 2015. [NYT] —Kathryn Brenzel