- Pressure to grow the book of business by making new loans and growing customer base.
- Optimism about the near term (18-24 months), but concern over the likely prospect of rising interest rates.
- Banks are returning to recourse lending on construction loans, but will allow recourse to burn off as goals are met.
- Legacy loans are being worked through at an accelerated pace.
A panel on the state of the capital markets at the Urban Land Institute’s fall meeting began with optimism about the current rate of growth and health of major banks. But concern crept in as panelists acknowledged that mounting pressure to build business could lead to something of a rewind of past cycles.
“Banks are under heavy pressure from analysts to show loan growth and revenue growth,” said US Bank’s Joe Mosely. “Some banks might put loans on their balance sheets just to build a book.”
The product type that seems most vulnerable to that possibility is multifamily, noted Katie Gnapp of Bank of America. “I’m worried about overbuilding in multifamily and some markets,” she said. “There could be a shakeout in 2014 or 2015.”
One reason for the pressure is that demand for traditional lending in the corporate sphere remains very limited, along with hiring. “One of the weaknesses of our business is that real estate capital can be deployed very quickly,” meaning that banks constrained to grow elsewhere will load up on real estate loans.
However, the panelists agreed that although business in major urban markets on the coasts is strong, it remains tepid in secondary and tertiary markets. Rising prices and falling yields in the hotter markets will push lenders to move out on the risk spectrum as they move to new markets in secondary and tertiary cities. One key question, said Mark Meyers of Wells Fargo: “Is there an exit for us in secondary markets?” But he also sees that the continuing return of CMBS lending “will bridge the gap between gateway cities and other markets.” New originations are approaching $50 billion, he said, adding that is expected to grow by 15-20 percent in 2013.
“Some folks are taking more risk in search of yield,” he cautioned. “If you are promising high returns, you’re probably going to take more risks to get that return.” The Fed’s recent QE3 actions could add fuel to that fire: “Bernanke gave a lot of people courage to do many things.”
Despite these concerns, the panelists agreed that banks have become more disciplined and are likely to hew to that change, focusing on cash flow rather than value is the prime directive in making lending decisions. “In the end, it’s about cash flow and the durability and quality of that cash flow,” said Meyers. Combined with a willingness to hold larger loans for longer periods on their own balance sheets, he believes banks will have more ability “to control our own destiny.”