Record-high commercial real estate lending holds challenges for banking industry, FDIC chairman tells group

Commercial real estate lending holds challenges for the banking industry, particularly as the financial institutions’ exposure to lending in that area is near a record high, the board chairman of the federal insurer of bank deposits said Wednesday.

In remarks before the Federal Deposit Insurance Corp.’s (FDIC) Commercial Real Estate Conference in New York, FDIC Chairman Jelena McWilliams said commercial real estate holds challenges for the banking industry, including potential boom and bust cycles and asset and liability mismatches. “In addition, the commercial real estate market, like all markets, is always adapting,” she observed.

McWilliams told the group that at mid-year, banks had eclipsed their 2008 holdings of commercial real estate loans (just at the beginning of the financial crisis of the last decade) with $2.4 trillion in loans held, and she said banks hold a “near record high” 61% of all commercial real estate loans outstanding. She noted that the balances of the loans at FDIC-insured banks have grown for 25 consecutive quarters, beginning in early 2013.

But she also argued that there is increased competition in the commercial real estate lending market. “Commercial mortgage-backed securities (CMBS), life insurance companies, and other nonbank lenders are active in the market,” she said. “In addition, private equity firms, public and private real estate corporations, and real estate owners and developers have entered the market and are providing financing for real estate projects.”

In other comments, McWilliams said that multifamily real estate loans — for apartments and condominiums — have also grown to record levels, reaching an all-time high of $445 billion at midyear. At 18.4%, the loans are at a record share of the total outstanding commercial real estate loans at banks, she said. “This growth has been driven by both large multifamily lenders expanding their portfolio as well as community banks expanding their real estate loan offerings to multifamily projects,” she said.

Keynote Remarks by FDIC Chairman Jelena McWilliams to the FDIC Commercial Real Estate Conference, New York, New York