Banks Are Betting on the Boom in Commercial and Industrial Real Estate

As I drive around town here in South Florida, I keep seeing more lots being sealed off with chain link fences — and “Financed by Bank So&So” signs slapped on the front. It usually doesn’t take long until a “Coming Soon” sign goes up, letting everyone know what type of gas station, restaurant, office, or car dealership will be there.

In other words, based on what I see, business is booming and commercial and industrial (C&I) real estate is picking up fast. And this growth doesn’t pertain to South Florida only. The latest (and historical) bank reports show this type of lending has been on a dramatic upswing since the Great Recession.

Before we get into numbers, let’s first answer a key question: What is C&I real estate? In simple terms, it’s property that is only used for business purposes and that is leased out to provide a workspace or manufacturing facility, rather than a living space. It can include anything from a single gas station to a huge shopping center, factory, or warehouse.

Now, let’s take look at those figures. As you can see in the graph below, we’ve seen significant growth in this type of lending since 2009. C&I lending jumped from $989.6 billion in 2009 to $1.89 trillion by the end of 2016. That’s 91.1% growth over the last seven years. And it continues to go up, with $1.94 trillion in outstanding C&I real estate loans as of Q2 2017.

As a percentage of all loans issued by the U.S. banking industry, it has exceeded the pre-recession level — reaching 21.5% in Q2 2017. Still, that’s not as high as the 27.3% from back in the year 2000.

In total, there are more than 5,200 banks involved in C&I lending. Some very little, others quite a lot. You can find small banks with only ten or twenty thousand dollars in C&I loans, while behemoths like Bank of America have hundreds of billions of dollars of them.

Indeed, many familiar names are on the “Top 10 largest C&I lender” list. To some of them, this type of lending represents a good portion of the overall loan portfolio. Although C&I loans don’t typically exceed 80% loan-to-value, too much C&I concentration can be dangerous if the economy takes a significant turn for the worse.

Top 10 Commercial and Industrial Real Estate Lenders

Ally Bank (Rated “A-”) relies heavily on C&I lending, with 45.3% of its loans in this category. Fifth Third (Rated “B-”), KeyBank (Rated “B”), and PNC Bank (Rated “C+”) are all in the 30% range, which is still quite high.

The bottom line is that C&I real estate has grown rapidly and continues to do so. It’s all good when things are going well. But banks, investors, and everyday customers need to be careful not to put all of their eggs in one basket. Be sure to check your bank’s exposure to this and other types of lending by visiting our website. Look under “Asset mix” in the “Summary” tab.

Think Safety,

Remi Lukosiunas

Money and Banking Edition, By Remi Lukosiunas, Financial Analyst Remi Lukosiunas, a Financial Analyst, joined Weiss Ratings in 2014 with a financial services background in internal audit and the credit union industry. Remi conducts banking, credit union, insurance and investment research. He has also written extensively on stocks and investing using ratings as a guide. Remi is a graduate of Florida State University with a degree in multinational business.