By all accounts commercial real estate lending is on the upswing this year, particularly lending by community banks. This is good news for the industry and for borrowers who need these loans to grow their businesses. Although the lending environment is different today than it was before the recession, many analysts believe that because of changes in lending practices by banks and other institutions, it has the potential to be just as dynamic and beneficial for both lenders and borrowers today, as it was before the recession.
Before the recession, many community banks focused on commercial real estate (CRE) lending because of the significant revenues it was generating at the time. High concentrations of CRE loans in their portfolios left many banks susceptible to economic shocks and without a diversified portfolio to withstand the economic downturn, many of these institutions ended up being shuttered during the recession.
Since the recession ended, a number of studies and investigations have looked at the lending practices that were common during that period and found that many institution’s policies were extremely lax. For example, it wasn’t uncommon for a potential borrower to obtain a loan even if they had little or no verifiable cash flow and insufficient collateral. Regardless of the risk involved, many banks would still give these borrowers a loan because they either knew the borrower personally, had a “gut feeling” that the loan would be profitable in the end, or were simply trying to grow their loan portfolios as quickly as possible. The end result of these practices for a lot of banks turned out to be bankruptcy and litigation as various state and government agencies filed thousands of professional liability lawsuits against them. Banks that survived the recession and new lenders that have cropped up since then have no desire to repeat the mistakes of the past and consequently, today’s lending environment is much different than it was just a few years ago.
Today, community banks are still making commercial real estate loans, but they have changed their lending practices to reduce their exposure in the event the country experiences another economic downturn. For example, they are lending on reduced loan-to-value ratios than they did in the past, they are focusing more on owner-occupied commercial real estate since that is viewed more favorably by regulators, they are being more selective when granting loans, they have strengthened their risk management procedures to avoid the possibility of taking on too many risky loans, and they have taken an additional step that has surprised many in the industry; specifically, many community banks are now stress-testing themselves. Although the “stress tests” that are required by Dodd-Frank and the Federal Reserve apply only to large banks, many smaller banks are actually stress-testing themselves to ensure that they will be able to withstand another economic downturn and whatever unexpected market fluctuations take place once the Federal Reserve begins raising interest rates. Even though they are not required to perform stress tests, these banks have embraced them and view them as a tool that will help them avoid unpleasant surprises in the future.
The changes that banks and other financial institutions have made to their lending practices have been well received for a number of reasons. First, these changes will benefit lenders directly by reducing their bad loans. Second, it will also benefit them indirectly by reducing the possibility of widespread defaults that could damage the economy and the businesses they’ve lent too. Lastly, as the number of defaults decreases, more businesses will stay healthy, which will lead to increased economic output and demand for their goods and services. This in turn will lead to increased demand for loans as businesses expand their operations to meet the growing demand for their products. Accordingly, senior living providers and others who are interested in obtaining financing for growth or other reasons should continue to look to financing firms like Cambridge Realty Capital which offers a variety of loan and other programs to assist companies with their capital needs.