Magazine article American Banker

Why Fears of a Commercial Real Estate Bubble Are Overblown

Magazine article American Banker

Why Fears of a Commercial Real Estate Bubble Are Overblown

Article excerpt

Byline: Chris Cumming

Commercial real estate lending has come roaring back, but don't draw comparisons yet to the reckless pre-crisis years.

Regulators and industry analysts who warn that the CRE market is starting to look like 2007 again are overlooking a key fact, according to Matthew Anderson, a managing director at the analytics firm Trepp. Banks have added so much capital in the past several years that they're better insulated against CRE risk than they used to be, despite the huge increase in those loans on banks' books.

So where some see a possible CRE bubble, Anderson sees only a market stabilizing after the trauma of the financial crisis and recession. "I think CRE is getting back to normal more than anything else," he says. "The overall volume of lending has grown, but it hasn't reached the peaks of 2007 and 2008."

Taken in isolation, the growth might look worrisome. CRE, as defined by regulators, comprises commercial mortgages, land and construction loans, and multifamily, along with unsecured CRE, which is mainly lending to construction companies and real estate investment trusts.

The total amount of CRE on banks' balance sheets as of the end of the second quarter had grown 31%, to $1.37 trillion, since bottoming out in the second quarter of 2011, according to Trepp's analysis. Land and construction loans, a massive source of losses during the crisis, contracted 4% in that time frame, but other CRE loan types have more than made up the difference.

Multifamily lending increased 72% over the past four years, to $320 billion, and is an area that Kelly King, the chairman and chief executive at BB&T, has singled out as particularly troubling. "We don't have a bubble yet, but we have an impending bubble," King said at a conference in September.

Unsecured CRE lending has grown 73% in that same four years. …

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