Economy Watch: Fed, FDIC Warn About Careless CRE Lending

By Dees Stribling, Contributing Editor

The real estate industry isn’t alone in mulling the possibility of an overheated commercial real estate market. On Friday, three agencies that concern themselves with CRE, among other things—the Fed, the FDIC and the Comptroller of the Currency—issued a joint statement on risk-management practices in commercial real estate lending. “The agencies have observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards,” the statement began.

The agencies noted that many CRE assets and lending markets are experiencing substantial growth, and that increased competitive pressures are contributing to historically low cap rates and rising property values. “At the same time, other indicators of CRE market conditions (such as vacancy and absorption rates) and portfolio asset quality indicators (such as non-performing loan and charge-off rates) do not currently indicate weaknesses in the quality of CRE portfolios,” it continued. That’s a good things, but “the agencies also have observed certain risk management practices at some institutions that cause concern, including a greater number of underwriting policy exceptions and insufficient monitoring of market conditions to assess the risks associated with these concentrations.”

All this has the potential to blow up in our faces, the Fed and FDIC seem to believe, though they’d never use such colorful language. In any case, they warned in their dry way that “financial institutions should maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. Financial institutions should have risk-management practices and maintain capital commensurate with the level and nature of their CRE concentration risk.”

Don’t get careless or greedy, in other words. The statement further added that the agencies are paying attention. “During 2016, supervisors from the banking agencies will continue to pay special attention to potential risks associated with CRE lending,” it said. “When conducting examinations that include a review of CRE lending activities, the agencies will focus on financial institutions’ implementation of the prudent principles… In particular, the agencies will focus on those financial institutions that have recently experienced… substantial growth in CRE lending activity,” and they might go so far as to “ask” financial institutions with inadequate risk management practices to get their act together.