Big regional banks that have been actively lending on commercial real estate loans in recent years are showing signs of slowing down as they near their caps or develop heavy concentrations in certain property types or regions. That slowdown is funneling more business towards smaller local and community banks.
“There are some banks in our valley that have pushed their loan-to-deposit ratios close to 100 percent,” says Kent Nelson, executive vice president with Brighton Bank in Salt Lake City, Utah. That capacity is creating new opportunities for the $150 million Brighton Bank. The bank financed about $40 million in construction and permanent loans in 2016 and has not seen much slowing in 2017.
Salt Lake City has been experiencing a very active real estate market over the past few years, which is fueling demand for capital. “The Salt Lake market has really become a hot bed for real estate investors all over the country,” says Nelson. For example, Brighton Bank is currently looking at a loan application for the purchase of a self-storage facility from a buyer from Colorado, and the bank has also approved the loan for a California investor to acquire a nearly $1-million development site for an office-warehouse project.
“We can tell that their buckets are full, because they are moving credits out,” adds Dickey Campbell, regional loan president with Texas First Bank, a $1 billion bank with 22 locations south and east of Houston. Texas First Bank is active in the commercial real estate loan market with typical loan sizes between $1 million and $3 million. Some regional banks are not doing new loans on certain property types, and they are also not renewing balloon mortgages when they come due as they deal with their own regulatory caps. “We are seeing more of those credits trying to come to us,” says Campbell.
Slow and steady growth
Community banks do have an appetite for commercial real estate loans. However, strategies vary on how aggressive they are willing to be to grow that business. Some banks have become more aggressive. “We have noticed that there is some slacking off in using prudent underwriting procedures, which shows that some banks have a short memory,” says Campbell.
Texas First Bank has a sizable real estate loan portfolio at $340 million out of a total loan portfolio of $540 million. However, the bank has been maintaining a very slow and deliberate growth pace, in line with its conservative approach to real estate lending.
Part of that caution is due to the new regulatory environment, including new requirements for high volatility commercial real estate (HVCRE) loans. “We are keeping a very close eye on our HVCRE loans,” says Campbell. The bank generates a monthly report to its board on HVCRE loans that are in the portfolio and also those that have been approved, but not yet closed.
Brighton Bank has tried to maintain careful and strict underwriting procedures and is stress-testing all of its credits. Given the rising interest rate, the bank wants to make sure projects would still get to debt service capacity of at least a 1.25 to 1.3 even with higher rates, notes Nelson. “We’re being cautious really in all sectors, because the market has been hot for a while,” he says.
That being said, there are still plenty of projects that Brighton Bank is willing to finance across all property types. For example, the bank recently funded an $800,000 construction-to-permanent loan to a local investment group that bought an older infill industrial property in downtown Salt Lake City that the borrower plans to renovate and upgrade.
Relationships trump transactions
Community banks have stepped up to supply capital for an active group of investors and developers looking for loans under $10 million. Although some community banks have lower maximum loan sizes, often between $3 million and $5 million depending on the size of the bank, they are also working together to do bigger loans. Brighton Bank, for example, has a lending limit of $3 million per loan, but it also participates with other community banks on deals of up to $6 million.
However, borrowers are finding that getting a foot in the door at community banks and smaller regional banks is no easy task in a sector where relationships are more important than ever. “If a borrower comes to us and wants to be transactional, that is going to be a hard new deal for us to do,” says Jason Ruppert, senior vice president of commercial real estate at Bremer Bank in Minneapolis. Borrowers that are willing to bring something more to the table to build a relationship, such as bringing deposits and using other banking services, get a much warmer reception, he adds.
Bremer Bank is an $11 billion bank that serves customers in Minnesota, North Dakota and Wisconsin. The bank has pulled back a little after a very active year in 2016. In the Twin Cities region alone the bank did $425 million in real estate loans last year, which is much higher than a typical year of about $250 million.
Lending activity increased due the active multifamily development market in the Twin Cities. “We grew really fast last year. So just to make sure we are still doing the kind of deals we want, with the people we want, we may be slowing down a little bit. But that is not because we’re not interested,” Ruppert says. Bremer Bank is capable of making loans from $ 1 million to $30 million, although the typical loan size is about $9 million.
Banks across the board are keeping a close eye on property types that might face greater risks due to increased supply, the maturing stage of the cycle or local economic factors. For example, Texas First Bank’s portfolio of hotel/motel loans is almost full and the bank is restricting loans in that category to borrowers where there is an existing relationship. “We don’t make a loan to a customer just to have a loan on the books,” says Campbell. “Our strategy is to loan to folks who will bank with us. So we put a very high priority on the relationship.”