| Even in a sluggish economy banks are maintaining and growing their commercial real estate loan portfolios at the same time they are tightening underwriting standards.
That is the major finding in a new survey of loan officers and senior management from 80 commercial banks conducted by San Francisco-based Bridger Commercial Funding.
Bridger reported that 86% of those responding to the survey said the level of their banks' commercial real estate lending will rise or remain steady through the end of the year.
Compared to a previous survey of the first half of the year 15% more banks anticipate higher loan volume in the second half of the year, while 34% expressed bullishness about the sector. In the first survey only 27% were bulls on commercial lending.
The growth will come despite a tightening of credit. Fifty-five percent of banks said their underwriting standards were tightened during the first half of the year.
"While their lending spigots are open, banks are illustrating discipline about the new loans they'll book," Peter Grabell, Bridger's senior vice president of relationship management, said in a statement announcing the survey. "In both of our 2003 surveys, 70% of the bankers indicated their banks are selectively building their loan portfolios, which is favorable for borrowers. It suggests that commercial real estate is performing relatively well, and that bankers want to provide debt capital."
Looking even farther into the future Dr. Joseph Hu, a managing director in Standard & Poor's Rating Services Structured Finance Group, said the strong credit performance of commercial mortgage backed securities should continue over the next several years.
In a written statement Hu said the credit performance is a reflection of the growing strength of the commercial real estate market.
"Economic expansion has historically been the norm, and economic recession the exception," Hu said. "With the real estate market gradually gaining strength following the anticipated stronger economic recovery in the second half of 2003 and beyond, one can expect that (commercial mortgage backed securities) will continue to perform strongly."
Grabell said the survey should be "very encouraging for borrowers acquiring or refinancing properties."
"Banks indicated they are most aggressive on those types of loans, while they reported softness in construction and value-added lending," he said. "It's a great time to be a commercial real estate borrower; the sector has generally performed well and banks want to lend on it."
The Bridger survey shows that in a departure from the previous real estate recession of the early 1990s, bankers are sporting healthy commercial real estate portfolios, with 88% reporting delinquencies below 1%. The strongest sectors cited were multifamily (84%), retail (77%) and warehouse/industrial (70%) followed by office (41%) and lodging (16%).
"We were something surprised by the relative strength bankers saw in retail and the continued weakness in the lodging sector," Grabell said. "We expected adverse tenant credit issues to have more of an impact on retail than has evidently been the case. But perhaps the strong sales figures that most retailers reported in July suggest that economic recovery is finally at hand."
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