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.”
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