Here's an article that caught our interest this week.
Banks burned by soured home
loans in the aftermath of the housing bust and subsequent financial crisis
found a quick replacement: mortgages secured by
commercial properties ranging from malls to offices.
In the years since 2008, U.S. lenders have opened the
commercial real estate (CRE) credit spigots, lending
money underpinned by properties including hotels, multifamily rental
units, and industrial compounds. Banks' total share of the CRE market
has subsequently jumped to a record 52 percent of loan originations
compared to just 35 percent as recently as two years ago, according to Morgan Stanley
data.
Now the concern is that banks won't be able to fund the $400
billion worth of CRE loans that need to
be refinanced in 2017 alone as
financial regulators step up their scrutiny of the sector. That
worry has grown more acute as sales of commercial mortgage-backed securities
(CMBS) have fallen to levels not seen in more than a decade.
"Banks have been filling the void in the CMBS market, where
issuance has declined 50 percent year-on-year," Morgan Stanley
analysts led by Richard Hill wrote in a note. "Given [regulators']
increasing concern about banks with high CRE exposures and years of loosening
underwriting standards, we see a scenario where the most exposed banks will be
unable to satisfy the CRE market's financing needs."
Of particular concern for Morgan Stanley is the threat of added
regulatory scrutiny of CRE lending by smaller banks, where competition with
bigger institutions and ongoing price wars are believed to
have spurred looser underwriting standards and reduced fees.
"We believe that the smaller banks may end up absorbing most
of the increased regulatory scrutiny related to the joint regulatory statement
in December, given their less frequent exam cycles, higher CRE concentrations,
and accelerating origination volumes," the analysts wrote.
The trend may go some way towards explaining why prices have
increased at a faster rate in "non-major" U.S. CRE markets outside of
big cities, bucking a historical trend that has traditionally seen major
markets grow at a faster rate. Over the past 12-months CRE prices in non-major
regions in the Moody's / RCA CPPI Index have jumped 7.4 percent
compared to just 3.1 percent for major ones, Morgan Stanley said.
"The greater scrutiny of bank CRE lending in general could
impact property valuations as lending conditions tighten, especially for some
multifamily and lower-quality
mallslocated in secondary and tertiary markets," the analysts
concluded. "These properties have benefited the most from smaller regional
and community banks increasing lending to CRE."