May 2, 2016

Banks’ Loss Rates For Commercial Real Estate Have Risen

Posted in Keith Knutsson, Real Estate at 7:29 am by Keith Knutsson

Loss rates on banks’ commercial real estate (CRE) loans rose in the final quarter of 2015 after being at multi-year lows the rest of the year, according to data from Sageworks, a financial information company.

First-quarter data is expected in the next several days, but the fourth-quarter increase in CRE loss rates (annualized net charge-offs as a percentage of average loan balance) occurred as regulators warned they are beginning to pay special attention to institutions’ activity tied to commercial real estate lending.

Senior Risk Management Consultant Rob Ashbaugh of Sageworks said it’s unclear what exactly led to the higher loss rate during the fourth quarter. However, he noted that loss rates have ticked higher in the fourth quarter during six out of the last eight years, and they remain well below rates generally seen since 2008.

“Charge-off rates are not horrible compared to where they were 10 years ago,” Ashbaugh said. “When you do commercial real estate lending, it’s all about lending to cash flow – do the borrowers have the cash flow to cover it, or if you’re in construction, do you have the tenants in place? Cash flow’s pretty good right now, and that’s why CRE is sort of taking off.”

Indeed, healthy borrower trends, low interest rates and competition for business led banks to boost their commercial real estate lending activity in 2015. ”Banks have been lending at interest rates that are very low, but they’re not making a lot of money because there is a small difference between the rates they borrow at and the rates they are able to lend at,” Ashbaugh said.” As a result, banks have been trying to get higher rate loans, such as commercial real estate, wherever they can.”

Source: http://www.forbes.com/sites/sageworks/2016/05/01/banks-loss-rates-for-commercial-real-estate-have-risen/#3c1ac4dc75cc

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