January 11, 2014
Bank Lending’s Future Remains Unpredictable
While bank lending entered 2014 as the dominant force in real estate financing, because of a number of different factors, its hold in this area isn’t as strong as it used to be. Some analysts see a changing landscape in commercial real estate financing with traditional lending from banks remaining a pillar of that landscape, though not as strong as it was before the recession.
Bank lending curtailed significantly during the height of the recession, and while it has rebounded in recent years, it is still not at its pre-recession levels. According to the Mortgage Bankers Association, during the third quarter of 2013, commercial banks in the Unites States originated $257 billion in commercial/multifamily mortgages. That is the highest amount since the end of the recession, and also represents a 22 percent year-to-date growth rate, but it is still significantly lower than the $445 billion in average quarterly originations that occurred between 2005 and 2007. Some analysts point to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) as the main reason that bank lending remains below its pre-recession levels. Dodd-Frank is a wide-ranging financial law that was passed in 2010 in an effort to prevent the type of aggressive lending that helped caused the financial crisis. In addition to placing stricter capital requirements on banks that arguably make it more challenging for them to lend at the same levels that they used to, Dodd-Frank also created new government agencies such as the Consumer Financial Protection Bureau. Amongst other tasks, the Bureau is charged with preventing predatory mortgage lending practices, reducing the incentives for mortgage brokers to push home buyers into expensive loans, and improving the clarity of mortgage paperwork for consumers.
As bank lending has decreased, REITs, hedge funds, and private equity firms have stepped in to fill the gap. For example, the total value of assets under management by private equity firms in the United States reached $335 billion in late 2012. This is an increase of 51 percent over its pre-recession peak. In addition to financing from private equity firms, REITs have also grown significantly in recent years. Lastly, as interest rates dropped during the past few years, an increasing number of hedge funds moved into the commercial real estate market because of the potential for higher returns that it offers.
The combination of Dodd-Frank, and movement by REITs, hedge funds, and private equity firms into lending roles that were previously dominated by banks is changing the traditional funding landscape. It remains to be seen if this a fleeting phenomenon or a more permanent situation. In the meantime, companies such as Cambridge Realty Capital will continue to offer attractive financing opportunities as an alternative to traditional financing from banks.