Community banks have emerged from the Covid-19 in a surprisingly strong position to embrace CRE lending.
Securing a loan from a large commercial lender is, at times, akin to turning around a cargo ship — slow and painstaking. By the time the corporate cogs have started to turn, regulation checklists consulted and calculations undertaken, deals can be lost to more swift operators. Increasingly, those operators are community banks.
Covid-19 created a blizzard of confusion for commercial lenders. Tenants stopped paying rents, landlords defaulted on loans, office buildings, retail outlets and restaurants remained empty. Amid the mess, larger commercial banks battened down the hatches and tightened lending protocols. However, a one size fits all approach, analyzing risk and potentially distressed loans furred the arteries and deal flow. This was where smaller, nuanced community banks with a feet on the ground approach to lending in local neighborhoods were able to steal ground on the larger institutions.
The potential of community banks has always been there. They represent the vast majority of banks in the United States, but according to fdic.gov, by 2019 they only had 12 percent of total industry assets and 15 percent of total industry loans. Despite this, they are essential for CRE loans, holding 30 percent of the banking industry’s commercial real estate loans, a huge slice, relative to the banks ’representation in the industry, and this was before Covid. Post Covid, according to a Community Bank CEO Outlook Survey, 52.9 percent of community bank CEOs report their greatest business challenge in 2021 is growth and 48 percent feel the answer lies in increasing loans with 38.6 percent believing commercial real estate lending is most likely to drive profitability in 2021.
The financial crash of 2008 was a pivotal moment in CRE lending. The scandals that wracked larger lending institutions (robo signing, no-doc, no downpayment, stated loans) have since stymied them with rules and regulations whereas community banks and credit unions are able to analyze deals on a case by case basis.
At the onset of Covid-19, many people believed the looming economic disaster could spell the end for many small lenders. However, according to the Wall Street Journal, they fared better than many would have imagined thanks in part to government stimulus incentives. Profit at community banks jumped 10 percent in the third quarter of 2020 and total loans rose 13.4 percent compared to 4.9 percent for the industry as a whole with deposits surging 16.7 percent. This affirmation of small local lenders in a time of crisis augers well for their role in commercial real estate lending in the future, when the pandemic dust finally settles and, buoyed by ongoing record interest rates, investors look to buy commercial property again. Now, flush with cash, community banks can fund many of the projects that come their way.
In a crisis, the local community becomes stronger than ever. Relationships are made and bonds forged. The local lender that was distributing free masks, fundraising for first responders, and helping overworked hospitals aren’t forgotten. Most importantly, these lenders are part of the community and able to focus on closing commercial loans, taking time to understand a borrower and their profile. This has several advantages:
• Many times, given the rural and suburban location of many local lenders, they know their customers outside of a business environment. They know the fine details about a customer’s business profile and can underwrite in a far more nuanced fashion than larger competitors. They are also aware of every single deal because of their focus on a small area and often form a symbiotic relationship with local investors and businesses, making them aware of deals that come their way.
• Some neighborhoods differ on a street-by-street basis, with other local businesses having a direct impact. A planned medical center will create a demand for multi-family housing. These are characteristics a larger lender might miss.
• With competitive interest rates and the security of dealing with a friendly face and the national zeitgeist seeming to favor the micro over macro, viewing big banks and Wall Street with skepticism, now is the time for community banks and credit unions to shine in commercial real estate lending.