2020 CRE Outlook: Trends Expected to Shape Commercial Real Estate Lending

Mary Ellen Biery
February 12, 2020
Read Time: min

To read news headlines, commercial real estate (CRE) is headed for a terrible 2020.

“Macy’s closing 125 stores signals ‘more pain’ for retailers,” ABC News reported Feb. 5. “Retailers like Pier 1, Papyrus and Express are closing 1,000 stores. That’s just the beginning,” warned the Chicago Tribune less than a week earlier. After retailers closed 10,800 stores in 2019, they have already announced new waves of closings as some – not all – retailers pay for their over-expansion or adjust to changes in the way customers shop, the newspaper said.

CRE a top focus for many bankers

Despite the painful evolution in retail, many experts expect another year of growth for commercial real estate – and for commercial real estate lenders, including community financial institutions. Community financial institution lenders, however, will want to “pick their spots” for CRE loans this year. And regulators have urged financial institutions to prepare for an eventual cyclical change while credit performance remains strong – and to do so as they originate new loans and in credit reviews. Navigating the CRE landscape in 2020 will require that financial institutions be able to spot red flags as they evaluate new loan applications and review existing credits.

The main drivers of expected CRE growth in 2020 are:

  • Low interest rates
  • Continued job growth and low unemployment
  • Moderate consumer spending growth
  • Abundant capital and return-seeking investors/lenders, and
  • Increased property values (albeit slowing in appreciation).  

“2020 could be a pivotal year for the U.S. commercial real estate industry, with geopolitical, economic and local regulatory issues in keen focus,” real estate services firm CBRE wrote recently in its U.S. Real Estate Market Outlook. “Despite transformational changes to our business, CBRE’s 2020 U.S. Outlook predicts a very good year for commercial real estate.”

These expectations for CRE growth are reiterated in Abrigo's 2020 Business Lending Readiness Survey: Preparing Now for Economic Uncertainty Ahead. Nearly half of about 300 bankers responding to the survey (48%) said CRE would have the top focus for growth in their banks’ loan portfolios. CRE edged out commercial and industrial lending among both large and small banks in the Abrigo survey, with 37% of all respondents selecting C&I as the highest lending priority, compared with 8% choosing SBA lending, and 4% pointing to retail lending.

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MBA's 2020 CRE outlook: Originations up 9%

The Mortgage Bankers Association (MBA) forecasts commercial and multifamily mortgage bankers will close $683 billion in CRE loans backed by income-producing properties this year, up 9%, after what preliminary figures estimate was a 13% increase in borrowing volume in 2019. MBA Vice President for CRE Research Jamie Woodwell said in a news release that low interest rates gave CRE markets a boost last year. “In addition to making mortgage borrowing less expensive, lower yields on a broad array of investment options are buoying the values of industrial, apartment, office, retail, and other income-producing properties. This increase in property values is expected to translate into increased sales transactions and demand for mortgage debt in 2020."

According to various real estate experts, areas of CRE expected to present growth opportunities in 2020 include multifamily, data centers, physician offices, and flexible office space.

"While investors are increasingly cautious and focused on an investment's potential for downturn protection, investment capital remains abundant. With global bond yields expected to remain extremely low and equity markets likely weaker and more volatile, the stable, solid returns of U.S. commercial real estate will be even more attractive," CBRE said in its report.

Changes during 2019 to the dollar volume of loans originated broke down by property type as follows, based on MBA’s preliminary estimates:

  • Multifamily: up 8%
  • Office: up 23%
  • Industrial: up 50%
  • Retail: down 6%
  • Hotel: down 19%
  • Health care: up 92%

Among investor types, commercial banks, which hold the most outstanding CRE mortgage debt, increased the dollar volume of originations by 20%, while loans for commercial mortgage-backed securities increased 24%, the MBA said. Loans for life insurance companies increased 5%, and government-sponsored entity (GSE) originations fell 1%.

CRE loan growth at community banks has been outpacing noncommunity banks, both in the quarter and over the last year, according to the FDIC’s latest Quarterly Banking Profile.  

Watching for CRE red flags

Despite expectations for growth, bankers, regulators, investors, and others are understandably watchful about potentially lower returns and credit risks in 2020, given that 98% of all insured depository institutions hold CRE loans and given increased CRE loan concentrations.

Slowing loan growth and non-bank lenders such as insurers, real estate investment trusts, and conduit lenders making competitive offers for deals are behind some of the worries, even though credit quality metrics remained satisfactory through 2019.

“CRE loan performance metrics at FDIC-insured institutions are strong, although institutions with CRE concentrations may be vulnerable to economic changes,” The FDIC said in its 2019 Risk Review. The FDIC’s Supervisory Insights fall newsletter also discussed banking CRE exposures and advised approaches to CRE risk management to avoid some of the issues that have surfaced during recent examinations.

Heading into 2020, banks seem to be continuing to respond to risk concerns. More banks than not said they expected to tighten standards on nonfarm nonresidential CRE loans, construction and development loans, and multifamily loans in 2020, according to the Fed’s January Senior Loan Officer Survey. Many banks throughout 2019 had reported tightening CRE standards, too.

Managing CRE portfolios will require lenders to follow best practices for underwriting and loan reviews. To learn more about how to face increasing competition and an uncertain economic environment, join the webinar, “Navigating the CRE Landscape: Leveraging Your Portfolio for Growth in 2020.”

To learn more about some of the lending and credit processes at other financial institutions, including loan turnaround times and challenges they face, see a copy of the 2020 Business Lending Readiness Survey.

 

About the Author

Mary Ellen Biery

Mary Ellen Biery is a Senior Writer and Content Specialist at Abrigo.

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Abrigo is a leading technology provider of compliance, credit risk, and lending solutions that community financial institutions use to manage risk and drive growth. Our software automates key processes — from anti-money laundering to fraud detection to lending solutions — empowering our customers by addressing their Enterprise Risk Management needs.

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