10 Jul Non-Bank Real Estate Lending Doubles as Traditional Banks Pull Back Amidst Mounting Debt
US Banks are retreating from Commercial Real Estate lending as huge debt piles. Following an unexpected closure of two US regional banks, Silicon Valley and Signature Bank in March 2023, has fueled speculations on the vicious circulatory influence between CRE, and the banking industry. Where more US banks are slowly reducing their CRE exposure. But does this mean the Real Estate industry is doing that bad? Well, stay with me till the end.
Is the Real Estate Industry Growth Declining?
The real estate industry is one of the promising industries, but when losses hit, investors suffer huge losses. It’s not for the faint-hearted, but like any other investment, risks are involved. The industry has five sectors (Multi-family, Industrial, retail, Hotel, and Office), and according to a 2023 FDIC report, four out of the five are doing well.
Since Covid-19, the office sector globally has not performed well, and was hit hard as demand for remote work increased. The sector seems to be gaining momentum as more people get back to work. However, banks are pulling back from Real Estate lending leading to increased Non-bank lending to bridge the gap.
Despite the banking sector, and CRE facing challenges of high interest rates from time to time, a close examination of what is happening now, and seven years ago during the Global Financial Crisis (GFC), reveals that the conclusions are less realistic than the headlines suggest.
What Does this Mean for Borrowers?
High interest rates, and economic uncertainties may lead to defaults to Real Estate loans that are maturing and backed with struggling assets causing banks strain. However, the CRE market is diverse, and as banks are reducing their exposure, the small and medium-sized banks are more likely to be affected more as they have higher exposure. In such events, Big banks, and non-bank lenders like mortgage REITs, private bridge lenders, and life insurance companies could step in, as seen recently, to bridge the gap.
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Regulatory policies, high risk of defaults, credit quality concerns, market saturation, and alternative investment opportunities have forced banks to reduce their CRE exposure. While banking institutions are retreating, Non-bank lending has doubled as borrowers rely on these lenders for refinancing.
For borrowers, this is a great opportunity to source funding from non-bank lenders, as their financing offers more flexibility and fewer requirements than traditional banks’.
