CRE Pricing Update: 2Q

Commercial Real Estate (CRE) Bank Pricing

As we head into the second quarter, banks are reporting being slightly behind their commercial (C&I) and commercial real estate (CRE) loan budgets for 2017 by 3% to 10%. Higher short-term yields, the delayed evolution of President’s Trump economic agenda, and commercial real estate concentration regulatory pressure have all played a role.  Pricing has remained steady over the first quarter in most markets with some major metro markets experiencing a slight decrease in pricing to the tune of two basis points. We chart benchmark community bank loan transactions below and the average pricing in the first quarter is down to the equivalent of Libor + 2.42%.

 

CRE Pricing

 

We view the outlook for the second quarter as slightly less competitive due to less demand from the items mentioned above. The CRE market will continue to become more bifurcated with some lines like multifamily continuing to tighten, while hospitality, retail, and construction will continue to widen. For community banks NOT to be adversely selected, CRE lending teams must get more granular with their pricing and have a clear view of risk as we get deeper into the business cycle.

 

 

Below is a recent survey of institutional CRE investors that mimics bank sentiment nicely and is highly correlated to future pricing trends. Investors ranked the attractiveness of investment with a rating of “5” being highly desirable. As can be seen, industrial, particularly owner-occupied industrial, continues to be the most favored loan type. For this sector, pricing has contracted five basis points as a reflection of demand. 

 

CRE Sentiment

 

We will have a full update in our 1Q Community Bank Performance Report coming up early next month that will also include an update on commercial loan officer metrics. Until then, banks, in general, should be risk adjusting their pricing and reallocating their sales/marketing investment to drive a more profitable risk/reward profile of their loan portfolio.