Big Banks Still Holding Off on Owner-Occupant Financing, Waiting for Stronger Economic Recovery
Companies interested in buying buildings their businesses occupy are finding a divided market for owner-occupied commercial real estate financing, with the larger national and regional banks still shying away from sourcing such loans and the smaller and mid-sized banks growing their portfolios.
The 10 U.S. banks with the largest concentrations of owner-occupied CRE loans have been shrinking their holdings of such loans. While overall CRE lending has been increasing at about 6% a year, owner-occupied has been decreasing about 2% at the larger banks. Those top 10 banks account for about 74% of such loans outstanding.
It's not that the larger banks are abandoning owner-occupied real estate financing, it’s more a matter of the firms they are targeting.
Regions Bank in Birmingham, AL, held the sixth largest portfolio of such loans as of March 31, 2014, at $8.68 billion. That amount was nearly 7% less than a year earlier.
"Production on investor commercial real estate has been pretty strong, and we continue to believe there are opportunities to grow that portfolio," Grayson Hall, CEO of Regions, said in his second quarter earnings conference call. "The owner-occupied segment of that, just for clarification, is heavily influenced by small business and medium size businesses," said Hall, adding that this market segment has been late to recover and have a lot of demand for credit.
"The stronger demand is up in the upper middle market, larger corporate customers,” Hall said. We “really need to see that customer segment strengthen a little bit more and develop a little bit more confidence to invest in their businesses and that’s predominantly driving that owner-occupied category.”
Meanwhile, the more than 6,000 other banks that make such loans have picked up some of the slack.
"I think loan growth is clearly the highlight for the quarter, and we're particularly pleased to see that it was very broad based growth with [commercial and industrial] and owner occupied loans of 7% in the second quarter over the first quarter and 13% over the prior year,” Jon Lorenz, chairman of Denver-based CoBiz Financial reported in the company’s second quarter earnings.
"We wondered about the owner occupied real estate portfolio given that interest rates have been so low and it’s an opportune time for business owners to purchase real estate," Lorenz continued. "Given the economy and the slow recovery, I think we certainly saw in the second quarter a nice increase and a commitment on the part of business owners to start moving in the position of trading out for buying new real estate."
Banks such as CoBiz embrace owner-occupied commercial real estate loans for a couple of reasons. They are underwritten on the financial standing of the business owner rather than the underlying leases in an investment real estate loan, and as such, they carry different risk profile.”
They are also generally more profitable because banks develop a wider relationship with the borrowers and can provide multiple products and services, including deposits, cash management and wealth management services. So the banks have the security of a CRE property backing the loan and can bring in additional fee income from the customer relationship.
Meanwhile, small business growth has continued to make slow but steady progress.
U.S. small businesses added 15,000 jobs in July, bringing the number of new jobs added over the last six months to more than 90,000. While 610,000 jobs have been added since the small business recovery began in March 2010, small business employment remains 870,000 jobs below its peak in March 2007, according to the findings of the monthly Intuit Inc. Small Business Employment and Revenue Indices.
“Things continue to get better, but slowly,” said Susan Woodward, the economist who works with Intuit to create the Small Business Employment and Revenue indices.
"The jobs added by small business over the most recent six months, including July, are more than double what we saw over the prior six months," noted Intuit's Woodward. "Even this rate of increase is slow. Even if small business adds 15,000 jobs a month for a year, small business employment would grow by slightly less than 1%.The job growth for the economy overall for the past year was 1.8%. The soft spot in the overall recovery, and particularly for small business, is construction.”