Uncovering the Opportunities in CRE Lending

Concerns about commercial real estate (CRE) exposure has some worried about banks' portfolio health, especially regional banks. However, certain CRE sectors are much more resilient than others, and some even present opportunities even in the face of potential economic volatility.

These more resilient CRE subsectors will provide practical financing opportunities for banks over the medium to long term. This blog will explore some of those opportunities and how community financial institutions can continue to proactively mitigate risk in their CRE portfolios.

CRE Sectors with Signs of Strength

Multifamily

Although rent growth has decelerated as of late, undersupply and population shifts in the United States since the pandemic still provide multifamily construction opportunities. Consumers are continuing the migration south of the last few decades, with Tampa, FL, Raleigh, NC and several other municipalities showing double-digit growth rates. As a result, there is a strong market for multifamily housing in these areas and an appetite for financing these projects.

At this time, overbuilding of multifamily housing isn’t a concern. In January, the National Association of Home Builders reported there were more than 900,000 apartments under construction, up nearly 25% from the same time in 2022, a 40-year high, with most of the building spurred by demand. No short-term or medium-term oversupply is expected.

Industrial

Macro trends such as onshoring, e-commerce and aging industrial properties should provide significant long-term demand for industrial real estate. E-commerce continues to grow, with Amazon and other companies building additional warehouse spaces and distribution facilities.

The pandemic, and the supply chain issues during and since, have led to an onshoring trend that has resulted in the growth of onshore industrial sites. Also contributing to industrial lending demand is the need to revamp some aging facilities. Altogether, these factors have resulted in a year-over-year increase in industrial rents of 17.3%.

Data Centers

Data centers are an emerging subsector within CRE that is also critically underbuilt and is growing rapidly as companies need a growing amount of data just to stay competitive. The coming explosion of generative AI will only add to the need for data centers.

How to Execute on these Opportunities

Commercial lending is complex. For instance, one multifamily opportunity in Tampa may look different than another multifamily opportunity in the same city. This can be the case for a number of reasons. The planned apartments may seek to attract renters of different income levels or the locations vary. Plus, different builders have their own different financial circumstances.

As a result, due diligence is a must. Banks and credit unions may face challenges such as assessing loan risk, navigating regulatory requirements, ensuring compliance with lending standards, and managing administrative workloads, just to name a few.

Where Technology Can Help

Taking a step back, evaluating your bank’s processes, understanding those processes, and then finding ways for technology to come in and help make it easier where appropriate is critical to be successful, especially in some of these more complicated deals and sectors.

Technology can support this and make CRE lending a little less daunting. Technology can also automate workflows so that credit and other applications automatically move from point A to point B to point C, with less manual intervention. Technology will also help with risk evaluation, helping to quickly identify those applications that should be rejected, those that are good to approve and those that should receive further consideration.

CRE has become more challenging as interest rates have increased and some traditionally strong sectors have softened. Yet, there are still some good opportunities for lenders in other areas. To uncover those opportunities, lenders need to conduct thorough due diligence informed by technology that fits the needs of the financial institution.

Author Bio

Baker Hill empowers progressive financial institutions to increase revenue, reduce risk, and drive more profitable relationships.

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