Executive on how pendulum is swinging towards the non-bank space
As banks continue facing pressure from regulators to take a cautious approach on commercial real estate lending, non-bank entities have an opportunity to step in and provide solutions across various asset classes – a trend that could continue for the foreseeable future, according to a leading executive in the space.
Jack BeVier (pictured), partner at Dominion Financial Services, told Mortgage Professional America that while the office market accounted for a sizable portion of current commercial uncertainty, banks were also tightening the purse strings in other asset classes, allowing non-bank lenders to grow their market share there.
That’s significant, he said, because it means banks will likely remain reluctant to ramp up lending in other spheres until there’s a degree of clarity about what’s in store for the troubled office segment.
“I’m optimistic about the non-bank lender side of things,” BeVier said, “because I think that until the banking industry fully quantifies its losses in the office sector specifically, and until the market gets comfortably that multifamily losses are either not going to happen or [are] quantified, the banks are going to continue to be sidelined, regardless of the interest rate environment, regardless of what the Fed does, because of regulators’ concerns.”
Banks could remain “sidelined” – with non-bank lenders filling that vacuum – even in those asset classes that aren’t feeling the same strain as the beleaguered office market, according to BeVier.
That’s a product of regulatory scrutiny across the entire commercial space, with institutional lenders facing calls to scale back significantly.
“Non-bank lenders have taken a lot of market share from the banks ever since the banking crisis last year, when commercial real estate lending has been heavily scrutinized by the regulators over the course of the past [12 months],” BeVier said.
“That’s led to a pullback across all CRE [commercial real estate] buckets, even single-family residential construction. The regulators still throw that into the same bucket as CRE… they’re worried about office, but they’re just telling the banks, ‘Hey, you need to do less CRE across the board’.”
For Alex Horn of BridgeInvest, the office space is currently marked by an “asymmetric risk-return position” that requires a significant shift for things to balance out.https://t.co/FVZQTInnjC#mortgageindustry #commercialmarket #realestate #officemarket
— Mortgage Professional America Magazine (@MPAMagazineUS) March 22, 2024
Regulators keep commercial real estate squarely in their sights
In February, the Federal Reserve’s vice chair for supervision Michael Barr said regulators were “closely focused” on commercial real estate loan risk and had increased downgrades of supervisory ratings in a fraught market.
Of particular interest was what banks might do to mitigate losses as well as their risk reporting procedures to boards and senior management, Barr said, as well as whether they can absorb CRE loan losses through reserves and other capital.
“For a small number of banks with a risk profile that could result in funding pressures for the firm, supervisors are continuously monitoring these firms,” he told an audience in New York.
While the risk levels associated with the office market have been well documented, it doesn’t necessarily make sense to apply the same strict approach to other spaces such as the residential commercial sector, BeVier said.
“I kind of feel like the resi space is the baby that’s being thrown out with the bathwater, and that’s led to a lot more volume for the non-bank lender segment of the industry,” he said. “That’s where we fit in – we’re one of those non-bank lenders.
“And so we’ve seen a significant uptick in demand: some formerly banked developers, small developers, that are now looking for non-bank solutions as the normal lenders are still sidelined for the overall greater CRE concerns.”
Could the US see a commercial real estate meltdown?
Systemic risk to the commercial real estate sector as a result of bad debt is still a distant prospect, observers including PNC Financial Services Group chief executive officer William Demchak have argued.
Demchak told Bloomberg last week that smaller lenders with higher concentrations in real estate than larger entities might feel the strain from commercial exposure – but their main areas of lending focus, in older Class B and C properties, were less popular among the biggest lenders.
“[Those properties are] kind of the area that’s going to get hit the most in a higher-rate environment with increased office vacancies,” he said. “But it’s not a systemic problem for the banking industry – not for any of the names you’d otherwise know. And we’ll make our way through it.”
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