Independent Banker - July 2021 - 20

PORTFOLIO
How are various CRE market sectors faring?
Bankers providing commercial real estate (CRE) loans are
navigating a complicated market where underwriting requires a
keen understanding of local market conditions.
COVID-19 has had a varied impact on different geographic
markets and sectors within the broader commercial real estate
market. Some have continued to perform, or even outperform,
while other categories have struggled. Notably, hospitality, hotels
and retail malls have been among the hardest-hit sectors, while
industrial, multifamily, self-storage and essential retail, such as
grocery and home improvement stores, have continued to thrive.
" Commercial real estate assets have largely performed fairly
well through the pandemic, which is in part due to the large
stimulus that has been given to tenants in general, " says William
Rowley, manager and underwriting solutions market analyst
at CoStar Group, a real estate research and analytics firm in
Washington, D.C. As of March, 95% of outstanding CRE loan
balances were current, with only 3.2% delinquent 90 days or
more or REO (real estate owned), according to the Mortgage
Bankers Association.
The strongest product types going into the pandemic-
multifamily and industrial-are recovering the quickest. Industrial
has only gotten stronger due to growth in e-commerce.
Multifamily has been bolstered by government stimulus that has
helped property owners maintain strong rent collections.
Office outlook uncertain
The outlook for office CRE remains more uncertain due to shifts
to remote and hybrid work that some believe could linger
and lessen demand for office space. One of the positives for
community banks is that, for the most part, they do not have
heavy concentrations of CRE loans that finance office space,
says Christopher Cole, ICBA's executive vice president and senior
regulatory counsel.
Another positive is that growth has shifted out of major metros
and more directly into many community banks' backyards:
suburban markets and smaller secondary and tertiary markets that
have lower population density and are less reliant on mass transit.
Construction lending has typically been the sweet spot for
banks in providing capital to CRE projects. According to the 2021
Construction Outlook from Dodge Data & Analytics, commercial
and multifamily construction is expected to improve slightly, from
$193 billion in 2020 to $198 billion in 2021. However, it remains
below the robust figure of $239 billion that occurred in 2019.
represents a decline of more than 20%
from the 12-month period that ended in
February 2020.
However, many experts have a more
positive outlook for CRE lending in the
second half of 2021. Federal Reserve
chairman Jerome Powell is among those
who expect economic and job growth to
grow more quickly as the percentage of
the population that's vaccinated continues
to rise.
" As the economy starts to really pick up
in the second, third and fourth quarters,
we will see CRE demand increase, " Cole
says. Potentially, that demand could even
bounce back to strong pre-pandemic
levels, he adds.
Brace for increased competition
Near-term CRE lending strategies are
going to depend heavily on how a bank's
existing loan portfolio has weathered
stresses caused by the pandemic. For
some lenders, there's still some mystery
to the outlook on how existing loans are
going to perform and what credit drift
has occurred within their loan portfolios,
says William Rowley, manager,
underwriting solutions, market analytics
at CoStar Group. " That is really going
to determine the appetite for additional
lending, " he adds.
Conservative underwriting has paid off
for Houston-based Cadence Bank. The
$18.8 billion-asset community bank saw
steady performance in its existing loan
portfolio in the past year, which helped
the bank accomplish a record year of
CRE lending volume in 2020. Cadence
Bank, whose loans for projects average
between $20 million and $25 million,
expects to see more good lending
opportunities ahead.
" Coming into the other side of the
pandemic, people are optimistic,
and that is translating to a lot of loan
opportunities for us, as well as increased
competition from other lenders, "
says Tim Williamson, the community
20 Q ICBA Independent Banker Q July 2021
Independent Banker - July 2021

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