THE BANKING CONUNDRUM
Commercial banks as well have to go through the same price-risk-underwriting analysis, looking over their shoulders at the regulatory environment all the while. Even more so, perhaps, than
“We see opportunities are with banks that have under-per-forming or non-performing notes that they want to get off of
their balance sheets, especially at the end of a quarter or fiscal
year, when they are highly incentivized to have less commercial
real estate on their books,” says White.
There is growing evidence, most lately put forward by the Federal
Deposit Insurance Corp., that the number of problem or troubled
banks has reached a plateau. However, lending to commercial real
estate—an asset class that is slowly coming back into favor by these
institution if only because of the lack of alternative investments—is
constrained by still-leery regulators.
Wells Fargo, for instance, is one of the most active banks both
lending to and investing in the space. This summer it made
headlines with the volume of commercial real estate debt it
digested from Irish lenders: it bought $3.3
billion in commercial real estate loans from
Anglo Irish Bank and $1.4 billion in US
loans from Bank of Ireland. In the spring, it
grabbed $500 million in loans from Allied
Irish Banks. A more recent example on the
lending side is the more than $200 million
in construction financing it provided to a
multi-site solar project for Sun Edison—
Wells Fargo’s largest renewable-energy construction loan to date.
The company has invested mainly in self-storage, although
earlier this year it launched a fund to invest in student housing.
“A lot of what we see are people who have built self-storage
facilities in 2007 and 2008, with a three-to-four year lease-up
period built in,” White says. “Now they should be stabilizing
those properties but they are instead behind in their pro formas. The property is great-looking but because of financial circumstances, the owner doesn’t have the capital to carry it.”
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Almost simultaneous with this announcement, however, Wells Fargo, Citigroup and
Bank of America, were downgraded by
Moody’s, leaving the industry to wonder
how aggressively Wells Fargo will continue
to pursue this market. Moody’s dropped
Wells Fargo’s senior debt to A2 from A1,
and, like BofA and Citigroup, was got a
To be sure, the ratings cut, as Wells Fargo
itself pointed out in a statement responding to
the cuts, was done due to the larger changes
expected under Dodd-Frank—namely, that
no bank is now too big to fail.
The news is not entirely grim for borrowers hopeful of a resurgent bank lending
market: Canadian Imperial Bank of
Commerce has said it plans to re-enter the
US market. (As an aside, CIBC was reported
to have been one of the banks beaten out of
the AIB transaction by Wells Fargo.)
Still, even with a bank as solid as Wells Fargo,
the Dodd-Frank game-changer, plus the stringent regulatory efforts at the local efforts, may
well be enough to force it to scale back.
“Banks haven’t loosened up on lending
side as much as everyone had expected, and in
the current regulatory regime I don’t see how
that is going to change significantly to any
great degree,” says Austin, TX-based Virtus
Real Estate Capital’s CEO, Kevin White.
Illustrating the maxim that for every loser
there is a winner, Virtus has been among the
distress investors making a killing. “We have
been buying a lot of bank notes lately on commercial real estate deals that haven’t worked
out,” White says. As of Sept. 15, the company
had closed on seven such notes this year.
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