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Bank CRE Lending Slows to a Crawl

After Seeming to Warm Up To CRE Lending Last Summer, Bankers Take a Step Back In Third Quarter
December 12, 2012
Like seemingly everyone else in the third quarter, banks retreated from their already tepid return to commercial real estate lending.

Overall, lending for investment and multifamily properties was flat with multifamily lending up just 1% and investment property lending up just about a one-quarter of a percent. Multifamily lending remains pretty much on pace with its year-over-year increase of 5%, but investment property lending is way off its 9% a year growth over the last four quarters.

Total construction and development loans were down 3.3% in the third quarter from Q2 and down 17.3% year to year. Balances of real estate construction and development loans fell by more than $7 billion in the quarter while the balances on investment CRE and multifamily properties increased only by about $4 billion.

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Also notable in the third quarter numbers is that small and large businesses that own their occupied properties continue to face a tough borrowing environment. Bank lending for refinancing or buying owner-occupied CRE properties dropped two-tenths of a percent in the third quarter - its second quarterly decline in a row. Year-over-year though, bank lending for owner-occupied CRE properties is up just a mere 2.2%.

Additionally, business loans to small businesses secured by nonresidential real estate were down seven-tenths of a percent from the previous quarter and down 4.4% year over year. Banks had 152,518 fewer small business loans on their books at the end of the third quarter of this year compared to the same period last year. That amounted to $27.9 billion less in outstanding small business loans.

According to the Federal Reserve Board’s latest credit conditions survey (Beige Book), construction and commercial real estate activity were generally improving. Gains were modest in most cases. Demand for office and industrial space continued to increase, although contacts at some businesses said they were “holding back on expansions due to uncertainty.” Contacts in New York noted that, while office markets across upstate New York were unaffected by Hurricane Sandy, there were some signs of recent softening.

Commercial and residential mortgage demand was flat across most of the country. Small business loan demand experienced modest growth.

CRE asset quality indicators continued to improve for banks in the second quarter.

The amount of total delinquent CRE loans and foreclosed properties continues to fall significantly. The total amount dropped 7.1% from the second quarter and now stands at less than $92.9 billion. The total amount is down almost 29% from a year ago.

Banks disposed of $1.42 billion in foreclosed properties in the third quarter with the largest percentage drop off coming from multifamily properties. Banks still held more than $24.2 billion in foreclosed CRE assets on their books, with more than $13.3 billion of that being construction and development properties.

The number of bank failures fell for the eighth time in the last nine quarters. Twelve insured institutions failed during the third quarter. This is the smallest number of failures in a quarter since the fourth quarter of 2008.

The number of institutions on the FDIC’s “Problem List” fell from 732 to 694, while assets of “problem” banks declined from $282.4 billion to $262.2 billion. This is the smallest number of “problem” institutions since third quarter 2009.

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