During the financial crisis that precipitated the last recession, and for a period of time afterward, banks and other commercial real estate lenders suffered significant losses on bad loans, forcing many of them to close or merge with other financial firms. It also left them hesitant to loan funds to anyone but the most creditworthy of borrowers. Fortunately for borrowers, the lending environment turned around in recent years thanks to an improving economy and various stimulus measures implemented by the Federal Reserve. Commercial real estate lenders are also seeing lower loss rates, which is motivating them to lend even more. While the lending environment remains positive and interest rates remain low, senior housing participants seeking capital to purchase additional properties, refinance debt, or for other purposes, should contact Cambridge Realty Capitalto learn more about the many different financing options it offers for senior housing transactions.
Loss Rates Drop Steeply
To the delight of lenders across the country, the loss rate for U.S. banks on commercial real estate (CRE) loans fell from nearly one-percent in December 2009 to 0.16 percent in June of this year. Similarly, the loss rate for construction and land development loans fell from nearly 3.6 percent in December 2009 to 0.24 percent in June. This is great news for lenders because it decreases their bad debt expenses and increases profits and cash flow, allowing them to lend even more and generate additional revenue. Increased lending for CRE loans was confirmed by the FDIC’s most recent quarterly report, which showed lending in the sector is now at levels not reached since 2007. This shows lenders feel more confident about the commercial real estate sector, and they are more willing to make loans now than they were during the last few years. Falling loss rates are good for borrowers as well because the additional lending in the sector makes it easier for them to obtain the capital they need to complete various projects.
Lending Standards are Still Scrutinized Closely
With increased lending in the CRE sector comes increased scrutiny as well. Because lax lending standards contributed to the financial crisis, government regulators are keeping a close eye on today’s lending environment and using new tools like stress tests to ensure lenders are not easing their standards too much as they increase the number of loans they issue. Most lenders are satisfied with the additional scrutiny as long as it does not result in significant compliance costs. Many of them were burned by bad loans during the financial crisis and have no desire to repeat their mistakes.
The third quarter is coming to an end this week, after which we will get new information on the amount of CRE lending that took place during the period. Borrowers are hoping these reports show lending activity in the sector continued robustly because this will expand their access to capital. Lenders are hoping for positive reports showing that loss rates continue to fall because this will improve their profits. If both parties are satisfied with the third-quarter’s lending reports and the economy continues to improve, lending activity in the sector will most likely continue to remain strong for remainder of the year.