The Latest On Bank Commercial Real Estate Loan Cash Flow

Commercial Real Estate Cash Flow

2013 property cash flows are starting to come in at many lenders and we have been taking a look at the data to see what insights can be gleaned that could give us an advantage. Combining bank data with data from the public markets, we can get a statistically valid sample size of over $130B worth of properties in almost all major metro and suburban markets (about 14% of the total CRE market). The below data may help banks when pricing and will give a clearer view of the risk profile when underwriting. 




For 2013, the outstanding performer in terms of both pricing and cash flow were hotels. Cash flow increased in almost every market we looked at and the average increase in the nation was 6.1%. It was actually the smaller metro markets that did the best, but cash flow for almost all types of hotels (luxury through extended stay) in both major metro and suburban markets did better than almost every other lending category and market for banks. Ironically, while credit spreads have compressed, they have not compressed as much as other classes and still represent the best return to cash flow position.




Apartment buildings produced an increased in cash flow driven by both higher occupancy levels and effective rents at about 4%. Like hotels, smaller metro markets performed the best, followed by major metro markets. As a side note, if you are a collateral focused, instead of cash flow, this was the asset class for you as property prices at the middle and end of 2013, eclipsed the highs set back in early 2007. These higher appraised values brought caused the largest drop in LTV’s at banks for seasoned loans. Unfortunately, since most of the market focuses on collateral values instead of cash flows (of course they are closely related), so this is the reason why pricing is near its tightest levels of the cycle. In many markets, supply (driven by record property prices) will eclipse demand hurting cash flow and increasing risk for banks.




Oddly, retail, despite its volatility and trouble in many markets put in a positive 2.3% increase in cash flows. So far in 2014, we are not sure this trend will continue, but banks should be increasing pricing to compensate for both the expectation of lower lease rates and potentially lower property values. Unlike, hospitality and multi-family, it was retail in major areas such as New York, Los Angeles and Chicago that caused most of the cash flow growth.




Industrial lending risk increased in tertiary markets, but fell in major and secondary metro markets. Overall, cash flow increased about 1%. For community banks, the average industrial property did better than the average retail property in terms of cash flow generation. For this sector, pricing for community banks, averaging about Libor plus 280bp, was better than retail thus providing a better risk-adjusted return.




RV parks, self-storage, parking facilities and other special purpose properties came in with about 0.3% cash flow growth. Almost all the appreciation and cash flow increased occurred in secondary metro markets. In smaller markets, this lending area produced a net cash flow decrease. Since this subsector is so diverse, it is hard for use to form any value opinion here.




The surprise of the analysis came from office properties coming in with about a 0.1% decrease in cash flow for 2013 over 2012. Secondary cities did the best and office properties in smaller cities were down about 2.2% causing the majority of the underperformance. Pricing has been tighter than all but multifamily making this one of the least attractive risk/reward tradeoff for banks.


While the above analysis was general and applied to the broad market, it is interesting for community banks to understand general trends. For the most part, cash flow in all CRE properties is increasing still making this an attractive center. However, for banks that face concentration issues.

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