The United States’ Office of the Comptroller of the Currency (OCC) has released its 20th Annual Survey of Credit Underwriting, providing valuable insight into bank lending of all types in 2014, including commercial real estate (CRE) lending. Senior housing construction has been booming this year in large part because of low interest rates and strong demand for senior housing services. However, the survey makes it clear that other factors are contributing to lending in this area as well.
Details from the Survey
The OCC’s survey is based on responses from 91 banks and according to the report, increased competition in the banking industry, ample amounts of liquidity, the desire for high-yields in a low interest rate environment and the growing economy all played a role in getting banks to relax their underwriting standards across a range of different loans during the year. For example, the report notes that one-third of its respondents loosened their commercial construction lending standards. This is the highest percentage of banks that have taken this action in a single year in over a decade. Along the same lines, 21% of survey respondents reported that the credit risk level for their construction loan portfolios increased somewhat during the year, which caught the OCC by surprise a little because this is more than twice the number of respondents who reported an increase in this area in 2013. Moreover, 44% of respondents expect their credit risk to rise even further next year.
In addition to these figures, the OCC also found that 37% of banks relaxed lending standards for commercial real estate loans in 2014, a significant increase from the 24% who reported relaxing standards in 2013, and lastly, just 4% of respondents said that they had tightened their underwriting standards which is a much lower number than the 76% of respondents who said that they tightened their standards during the Great Depression.
This is the third straight year that banks have eased underwriting standards for commercial real estate loans and while no one is panicking about this development yet, banking regulators and the ratings agencies are beginning to offer a few words of caution. For example, analysts from Standard and Poor have said that investors who are interested in the banking sector should monitor the underwriting standards of the industry in order to avoid losses that could occur if defaults rise and profits fall as a result of lower lending standards and more aggressive loan pricing.
Overall, the survey makes it clear that in addition to low interest rates, relaxed lending standards have also contributed to increased development in senior housing and if this trend continues, development could increase next year as well. Senior housing providers and investors who are seeking capital to purchase some of these new properties or for other reasons, should continue to look to the Chicago-based financing firm Cambridge Realty Capital for assistance in financing acquisitions and other senior housing transactions too.