FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 16 April 2016

The Unforgiving Commercial Real Estate Cycle

from the Atlanta Fed

-- this post authored by Charles Davidson

Pity commercial real estate lenders. They can hardly enjoy the good times. Or at least maybe they shouldn't enjoy them too much, because just when times seem brightest, history says the worst is soon to come.

This dynamic is important to the southeastern economy. Real estate lending remains the predominant business of banks in the Southeast.

Indeed, one of the big questions looming over the Atlanta Fed's recent Banking Outlook Conference was whether the peak of the post-financial crisis commercial real estate (CRE) cycle is at hand. The answer: nobody knows. It's impossible to identify the "inflection point" in real time, according to Sam Chandan, an economist at the University of Pennsylvania's Wharton School and commercial real estate consultant, who spoke at the conference.

Take the apartment business. Brian Bailey, a senior financial and policy analyst in the Atlanta Fed's Supervision and Regulation department, figured apartment rental revenue had crested by 2013 after three to four years of strong escalations. Bailey's analysis led him to conclude that the rapid growth in effective rental revenue was due to level off and slow down. Growth rates slackened in 2013. But growth rates turned right back up the next two years.

Loans made today could mature in totally different economy

Right now, vital signs in property markets are generally strong. Delinquency and default rates of CRE loans and building vacancy rates are the lowest since the financial crisis, Chandan pointed out. Nominal prices for office buildings and other commercial properties are at historic highs in major markets, in part fueled by an influx of overseas capital. Apartment rents, as Bailey noted, keep climbing faster than personal incomes across the country.

Times seem flush. And that's exactly why Chandan advised caution. He noted that loans made today will likely mature amid economic conditions different from those of today.

Using history as a guide, he said: "It is at this point in the cycle that we ultimately make the loans that will one day prove to introduce the greatest stresses to our balance sheets."

CRE loan volume steadily climbing

Since a nadir in late 2012, the volume of commercial real estate loans on the books of southeastern banks has climbed to about $160 billion at the end of the 2015 third quarter, according to the latest data from bank call reports. That's below the 2008 peak of more than $200 billion. (See the chart.)

Nationally, bank CRE loans outstanding during the third quarter of 2015 ascended back to the highs of 2008, at about $1.6 trillion. And the dollar volume of transactions - mortgage-financed apartment and commercial property sales - has reached record levels, according to Chandan, hitting $470 billion in 2015, from a trough of $83 billion in 2009.

The enterprise of lending money to property developers, builders, and property owners has become increasingly complex. Newer international investors from China, especially, have different time horizons and motivations than do longer-standing foreign investors from Canada and Europe, Chandan noted.

Many players, regulated and unregulated, compete to make real estate loans. Consequently, the market and not individual lenders sets market lending rates and terms, Chandan and Bailey pointed out. So the bank that refuses to bend its underwriting standards can watch customers walk away.

Community banks and regional banks in particular can face a stark choice: "Either compete on terms set by the market or not be in the market at all," Chandan said.


About the Author

photo of Charles Davidson

Charles Davidson is a Staff writer for Economy Matters

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Contributors


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
The Destruction of the Existing Workforce
Minsky’s Theory of Asset Prices: Why Minsky Was NOT a Neo-Monetarist
News Blog
Rent Growth For Lower-Priced Rental Homes Stayed Strong, But Higher-Priced Rental Homes Slowed In 2016
How Do Imports Affect Manufacturing Jobs?
Active Vs Passive Investing: And The Winner Is ...
Infographic Of The Day: The Incredible Pigeon
Early Headlines: Global Unaffordable Housing, Trump Signs ACA Exec Order, Trump Orders Halt To Regs, Enrollments Increase, Greek Tragedy, China Household Debt Surges And More
The Rise Of The Gluten-Free Diet
Who's Smoking In The U.S.
Six Cosmic Catastrophes That Could Wipe Out Life On Earth
What We Read Today 20 January 2017
13 January 2017: ECRI's WLI Growth Index Insignificantly Improves
Rail Week Ending 14 January 2017: Some Improvement
Majority Of Job Seekers Uncertain About Trump Impact
Investing Blog
Technical Thoughts: Three From The Trading Room
Why Are Investors Moving To ETFs?
Opinion Blog
Economics, Society, And The Environment: What's Wrong With This Picture?
How To Read Theresa May's Brexit Speech
Precious Metals Blog
Four Catalysts Drive Gold And Silver For 2017
Live Markets
20Jan2017 Market Close: U.S. Stocks Were Up But Off Their Highs Of The Session, Crude Prices Continue To Climb, Next Week May Be Volatile
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved