Commercial Lending Could Tighten Due to Loan Loss ReservesMay 14, 2019
Banks are about six months away from changing how they account for loan losses. This change, also known as “current expected credit losses” or CECL, is a new accounting rule that is forward looking and takes into account the probability of future loses. The net effect of this accounting change is that banks are going to need to set aside more money for potential loses which will decrease the amount of funds available for lending.
The accounting rule change will more than likely make banks look less profitable to investors and motivate lenders to be more conservative with their lending to minimize the impact of the new accounting methodology.
How will this impact the buyers of commercial real estate? According to Ilya Fishman, manager, financial analytics for Costar Group, thinks that we can expect to see “restricted lending, together with quantitative tightening, and potentially higher interest rates may prove to be a difficult environment for commercial real estate.” In addition, longer-term fixed rate loans, such as those backed by real estate, are less attractive to banks and the longer a bank holds onto a loan with a fixed rate in a changing rate environment, the more the bank will need to set aside for potential losses.
According to Jack Kopnisky, president and chief executive of Sterling Bancorp in Montebello, New York, “the longer-term assets just are not going to be as attractive in the near term.” In other words, banks will want to make shorter term loans to burrowers. One should expect more loans that are due in three to five years.
What should you do if you’re an owner of commercial real estate or a buyer considering a purchase? For existing owners, if you are thinking about refinancing, now may be the best time to do that so you have an option of locking in the interest rate for the maximum term. For buyers in the market this year, this change may make it harder to get approved for a loan so my recommendation would be to get pre-approved. Once you are pre-approved, it may be best if you consider a purchase sooner to avoid a more difficult lending environment later in the year.
For more on this topic, please see the article from Costar, “Real Estate Loans Could Tighten As Banks Prepare to Boost Loan Loss Reserves” and if you need help assembling a road map on how to buy your next investment, or refinance, please don’t hesitate to give me a call at 925-239-1422.