Banks, Awash In Capital, Face A Competitive Lending Environment In CRE

With certain commercial real estate sectors thriving and others fighting for their future, the status of CRE bank lending has seen more than its share of fluctuations since the start of the pandemic. Partner Insights spoke with Chris Niederpruem, Managing Director, Head of Real Estate Finance for CIT, to learn how bank lending has been affected by recent world events, and where it stands today.

Commercial Observer: How would you characterize the state of bank lending in commercial real estate today?

Chris Niederpruem: It’s extremely competitive. We’re amidst one of the most competitive years in the last decade – the lending markets for CRE are awash in capital. If we narrow that in scope from all lender types down to bank lending, it’s still extremely competitive. There’s more capital available than there are good deals to be done in the sectors that people want to do them in.

How has this changed the way CIT views the industry?

For the second and third quarters of 2020, everybody was holding their breath. As we came into 2021, there was cautious optimism where it felt like there was a recovery in terms of the vaccine rollout but we were also still dealing with impacts from the pandemic. We’ve certainly had our work cut out for us trying to figure out how to look at the industry as a whole, and how to look at different markets and property types. Location, location, location is the old adage in real estate, but sector has been a real driver of appetite this year. When the pandemic started, hotels and retail centers shut down overnight, and industrial was a beneficiary, because that sector was growing. 

What are some of the notable trends or effects of all this that you’re seeing in bank lending now?

Starting in the fourth quarter of 2020, when the bank lending market reopened in earnest, we’ve been seeing a real concentration of appetite around multifamily and industrial. There are obviously some exceptions in certain markets, like those where populations flocked during the pandemic. The Southeast is a great example. There’s been a lot of migration from the Northeast to the Southeast – to the Carolinas and Florida – so we’ve seen more varied demand there; including in office. But as a whole, the demand has been focused around multifamily and industrial. In the fourth quarter of 2020, there was almost no demand for hotel, retail, or office. In 2021, we’ve seen demand return earlier than most expected to hotel. Lending demand came back into that space, but it’s still slower for retail and office. Retail had been struggling pre-pandemic, and office is just more complicated to figure out. What do tenants want in terms of office usage moving forward? Tenants aren’t sure what they want, because they’re still trying to figure out what their employees will accept.

Have investment trends been going the same way?

Generally, the trends are the same. There’s certainly more money in multifamily and industrial than anything else, probably followed these days by hotel. Some opportunistic buyers say that now’s a great time to buy office property at a great basis. 

What does this all mean for bank lending products?

Bank lending has historically focused on construction lending, term lending, and then bridge lending and value-add properties. We see the banks competing more in the construction and term space these days, and less in the bridge or value-add space. There’s a vast number of non-bank lenders that have been entering the marketplace over the last five years or so, and they’ve been able to finance themselves efficiently with lines of credit and the CLO market. These lenders are squarely focused in  the bridge lending space. So that has pushed banks to focus on more term and construction lending, which is historically what they’ve been very good at. 

What are the implications of this being such a strong borrower’s market?

As I mentioned earlier, it feels much more competitive today than it had been pre-pandemic. Early in the pandemic, a lot of capital was raised for distressed opportunities. Those opportunities didn’t ultimately materialize en masse, so that capital has pivoted towards lending. Then there’s a huge amount of money floating around in the lending system. And as banks have triangulated around industrial and multifamily, there’s pressure on pricing, and we are slowly seeing pressure on LTC and structure.

Given all this, are there any reasons for lenders to be optimistic right now?

As the recovery continues and there’s more comfort around hotel, retail, office, and other sectors, the demand will start to disperse a bit, and the competition may not feel as fierce. Right now, a lot of lenders are clamoring around not enough deals. But as these other sectors recover, there should be more opportunities.

View more articles on the Future Of CRE Banking here.