A few large commercial banks are becoming more bullish on commercial real estate, in the latest sign that the financing is beginning to flow more freely into the capital-starved sector.
While many banks continued to cut their exposure to commercial real estate in the first quarter,Wells Fargo & Co.’s portfolio rose to $101 billion, up 1.7% from the fourth quarter and 3.3% from the first quarter of 2010. It was one of the bank’s few lending segments that actually rose from the fourth quarter.
J.P. Morgan Chase & Co. has about $5 billion of loans in the pipeline, about $1 billion of which is new construction. That is a threefold increase from its pipeline 12 to 18 months ago, bank officials say, a turnaround from recent years when the bank all but stopped originating commercial real-estate loans. Deutsche Bank AG, meanwhile, has made numerous large balance-sheet loans focused on transitional or higher-risk properties in the past six months.
“There hasn’t been a lot of new development and activity,” says Todd Maclin, who heads J.P. Morgan’s commercial bank. “That has led to some improvement” in lending terms for banks, making it more attractive to lend, he says.
The lending shows that some banks are strong enough to once again start loading up their balance sheets with commercial-real-estate loans. The more aggressive strategies also come as real-estate values improve in some markets, and borrowers are willing to accept more conservative terms. J.P. Morgan won’t do any “crazy” underwriting, Mr. Maclin says.
During the early years of the downturn, banks cut back sharply on such lending, putting a damper on real-estate values and forcing many properties into bankruptcies and foreclosures. But in the past year, as the economy has shown signs of recovery, insurance companies have picked up their volume of commercial real-estate loans, and securities firms and banks have begun to bring the market for commercial mortgage-backed securities back to life. The CMBS had helped fuel the bubble in commercial real estate by giving lenders a chance to create loans while sharing some of the risk with investors. When the bubble burst, the market all but disappeared. The return of CMBS gives lenders a bit of coverage on risk, more than old-fashioned loans the banks create to hold on their balance sheets.
Some $118.8 billion of commercial and multifamily mortgages originated in 2010 in the U.S., up 44% from 2009, according to the Mortgage Banking Association. Volume in the fourth quarter rose 88% from a year earlier.
But banks have been slower to return. Even as many commercial banks scramble to get into the CMBS business, most still can’t stomach taking all the risk for new loans.
Bank of America Corp., the nation’s largest bank by assets, cut its commercial real-estate exposure to $42.8 billion in the first quarter, down 26% from a year earlier. Other banks shedding such assets include Huntington Bancshares Inc., KeyCorp and SunTrust Banks Inc.
Their continued distaste for the sector partly reflects weak vacancy and rental trends in many markets, which have left tens-of-billions-of-dollars of properties “underwater,” or worth less than their mortgages. The delinquency rate of construction loans increased in the first quarter to 18.3% from 18% in the fourth quarter, according to a projection by Trepp LLC.
Wells Fargo has been one of the first to venture back because both Wells and Wachovia Corp., which it bought, were traditionally major players. “We’ve always had affection for [commercial real-estate], and, we think, a lot of expertise in it,” says Ed Blakey, head of the bank’s Specialized Lending, Servicing and Trust unit.Wells Fargo is making loans in “all the major food groups,” he says, including office, retail, hotel and multifamily property.
“Fortunately, one of the great benefits of the market crash is it knocked sense into borrowers and lenders as to what is appropriate risk,” Mr. Blakey says.
J.P. Morgan is returning to the sector after beating a retreat well ahead of the financial crisis. The bank shrank its real-estate exposure to about $7 billion in 2007 from about $20 billion in 2004. “I can’t sit and tell you that we saw the end of the cycle better than others,” Mr. Maclin says. “We just looked at the individual deal … and said no.”
Now J.P. Morgan is saying yes. While the bank is avoiding retail, it has become one of the largest lenders to private owners of rental-apartment buildings. J.P. Morgan also is being opportunistic: Last year, it purchased a portfolio of real-estate assets with a face value of $3.5 billion from Citigroup Inc., which Mr. Maclin says has far outperformed expectations.
Like other banks, J.P. Morgan is being conservative in its lending standards. It recently made a $70 million loan to Cole Real Estate Investments to buy the headquarters complex of Apollo Group Inc., which runs the for-profit University of Phoenix. Not only does Apollo have a 20-year lease, but the total price of Cole’s purchase was $170 million, giving the bank a lot of protection.
And some of the banks in rare cases are willing to go into riskier lending, giving borrowers even more hope. For example, last fall, Deutsche Bank joined Related Cos. to purchase an in-default $250 million loan on 1775 Broadway, a Manhattan office tower that was struggling with high vacancy amid a major renovation.
Other lenders, such as insurance companies and those that pool loans to sell them as mortgage-backed securities, tend to avoid such risky assets.
credit d. benoit,e brown, wsj)