Unique Times for Commercial Real Estate Banking

Soliciting feedback from our peers in commercial real estate private equity, we confirm our belief that very few transactions are occurring. The headwinds are strong.

Money center banks have been sidelined for twelve months and the local/regional banks are extremely cautious about where and with whom to lend. Banks with capital to lend have not had this much leverage with borrowers since the years just after the Great Financial Crisis.

The banks have an insatiable appetite for deposits, both to solve troubled loans or to balance an investment portfolio. Deposits are critical for banks but they do not make money until they lend those deposits at 8%-10% interest rates where they can achieve 3-5% profit on every dollar.

UNDERSTANDING COMMERCIAL REAL ESTATE BANKING DEPOSITS

Banks are dictating real estate borrowers put 10-20% of the loan amount in additional deposits alongside their equity. Every bank has its own policy on the deposit amount and how long the money needs to remain at the bank.

The deposit timing varies between the construction period on the short side and the length of the loan on the long end. Once banks have achieved the loan to deposit ratio goals, every dollar that is not on the street making money is a drag on banks’ potential earnings.  

It’s plausible that some banks have raised too much in deposits and when they curtailed lending, they are now out of balance. As deposits become stickier for banks and as their financial footing strengthens, there will be greater pressure to lend on commercial real estate.

For the mediocre deals, the timing will be too late. But the great deals will still get done and we will slowly return to a competitive lending environment.  

It might be unthinkable to consider banks becoming more active in commercial real estate lending today, but it is happening. If you are in the market for a bank loan, expect to talk to many lenders.

Regardless of whether they are actively lending at the moment, put time into the relationship because at some point soon they will be asked to get money out into the market, and you’ll want a seat at that table when the loans are served again.