Froth or not? Banks telegraph mixed message on commercial real estate market

Froth or not? Banks Telegraph Mixed Message on CRE Market

Two powerful commercial real estate lenders sent two differing signals to the marketplace in recent days. One accelerated commercial real estate growth, the other tapped its foot on the brake.

Wells Fargo & Co., the nation’s fourth-largest bank, announced it will purchase GE Capital’s Commercial Distribution Finance and Vendor Finance platforms as well as a portion of its Corporate Finance business. The acquisition includes total assets of approximately $32 billion as well as businesses employing approximately 3,000 team members.

“This acquisition is an outstanding opportunity for Wells Fargo to deepen relationships and strengthen our presence in key commercial lending markets,” Tim Sloan, head of Wells Fargo Wholesale Banking, said in regards to the GE deal. “GE Capital’s businesses are industry leaders with proven business models and capabilities backed by exceptionally talented and experienced teams. These advantages, in addition to portfolios that are diversified geographically and by industry, will allow Wells Fargo to continue to grow our business in order to better serve the needs of new and existing Wholesale Banking customers.”

Leaders billed the deal as an opportunity to keep growing its real estate lending operations. Then, Wells followed that announcement with third-quarter commercial real estate lending growth of 12 percent, The Wall Street Journal reported.

Meanwhile, US Bancorp, a Wells Fargo competitor in the Midwest, took time in its most recent earnings report to raise red flags about commercial real estate. Chairman and CEO Richard Davis warned analysts not to expect more growth.

“The one area that we’re not growing right now is CRE,” Davis said, according to transcripts. “It’s an area that we think has some undue risk in it. It’s a pretty overheated market in not just certain locations but the terms and the recourse/non-recourse decisions that some banks are making, and we’re not going to participate in that.”

Down the food chain, Little Rock, Arkansas-based Bank of the Ozarks echoed the sentiment. Its CEO, George Gleason, told analysts he believes the bank is seeing the late stages of the credit cycle and will begin to look for less leverage in its commercial real estate deals by asking for more equity from borrowers.

“We are being very defensive in what we are doing,” he said.

The trend highlights the importance of maintaining a strong investor base to provide equity for new transactions. With the ghosts of the Great Recession still fresh in most bankers’ minds, the emphasis on conservatively structured deals will likely grow.

“Commercial real estate is still a terrific investment when it is properly underwritten and properly leveraged,” Investor Management Services CEO Robert J. Finlay says. “US Bank is smart to focus on strict underwriting. You have to do that when the market gets a little frothy. At the same time, Wells Fargo has the capital to roll the dice a little bit and purchase assets that will help them gain more share of the market.”