As 2014 kicks off, many U.S. bankers say it’s high time to start growing everybody’s commercial real estate portfolios - except for their own, that is.
While projecting significant growth in CRE lending this year in most markets, banks continue to downsize their branch retail networks and streamline headquarters space.
SunTrust Bank’s chairman and CEO William Henry Rogers, told his CRE loan originators: "Keep growing, I’ll tell you when to stop," Rogers told analysts this past week on his fourth quarter earnings conference call.
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Rogers said he’s going to let his loan originators run a little bit for the next couple of years, and then the bank will take stock of its total portfolio size.
“The good news is other parts of our business are growing as well. So its percent of the pie will also be determined by how big the pie gets,” Rogers said.
At the same time, Aleem Gillani, CFO of SunTrust Bank, on the same conference call said the bank is still rightsizing its own operations. The bank wants to cut $50 million a quarter in overhead out of its expense base.
"We’re still making changes in our overall footprint and corporate real estate. And I think we’ll be able to take dollars out of that space,” he said.
For example, this past weekend, SunTrust moved more than 100 employees in the greater Washington, DC, area out of two separate buildings and three separate floors into one common space. In doing so, Gillani said the bank will be saving $100,000 a month in rent starting next month. And Gillani said he sees lots of opportunities for similar consolidation moves.
U.S. Banks Downsizing Space, Upsizing Lending
SunTrust Bank isn’t the only bank to be looking at downsizings. U.S. banks have been steadily shrinking.
From Oct. 1, 2012 through last September (the last full quarter for which numbers are available) banks closed a net total of 958 branches; counted 25,472 fewer employees and had shrunk the value of bank premise and assets by $1.08 billion.
“We continue to optimize our distribution network. Banking center building square footage has declined about 4% from a year ago to 744,000 total square feet, even as we added two new, smaller banking centers in high opportunity markets,” said James Smith, chairman and CEO of Webster Financial Corp. “The momentum continues at the start of 2014 as we recently consolidated two banking centers into a single new facility.”
“I think you really have to look at this as at least a three year process,” Smith said. “We’re down around 744 [offices] right now. We were at one point at least 800. So we’re making progress. We’ll continue to make progress through this year and then as the leases come up, that will accelerate later this year and into next year.”
Among its major accomplishments last quarter, Bank of New York Mellon touted the recent move of its New York Treasury and Trading operations from a leased building in downtown Manhattan to one of its owned properties.
“It’s another example of how we’re taking action to reduce the cost of our real estate footprint around the globe,” said Thomas P. Gibbons, CFO of Bank of New York Mellon.
John Gerspach, CFO of Citigroup Inc., said: “We still have facilities that are just larger than we currently need based upon how we’ve been able to reduce headcount, and there are still facilities and leases that we need to exit.”
“We are still in the process of rationalizing our branch network in the U.S.,” Gerspach added. “Certainly throughout 2014 there is going to be repositioning cost that we take as we continue to streamline the operations.”
Bullish On CRE Lending Prospects
Outside of their own real estate, U.S. banks remain fairly bullish on CRE growth prospects.
"Currently the strongest of our five organic growth engines is [our] real estate specialties group, which has contributed the majority of our organic growth in recent years,” said George Gleason, chairman and CEO of the Bank of Ozarks.
In the past year and half, the bank has opened real estate lending offices in Dallas, Austin, Atlanta, New York City, and will be opening another new one next month in Los Angeles.
O. B. Grayson Hall, chairman, CEO and president of Regions Financial, said that last quarter Regions saw a potential upside in CRE loan growth of 4%. This past week in his earnings conference call, Hall upped that outlook to 5%.
“We believe that our commercial real estate portfolio, for the first time, is close to a stabilization point,” Hall said. “The big thing I would say is we're seeing more diversified demand, both across lending segments and across markets. It's broader and more diversified than it was a quarter ago.”
David J. Turner, CFO of Regions added that, “if you look at commercial real estate in particular, multifamily and the homebuilding portfolios look strong. We're sure comfortable with those going into 2014.”
Big banks in big markets backing big deals has been and still is pretty much the formula for loan growth for most banks.
Joseph J. Depaolo, CEO and president of New York-based Signature Bank, noted a prime example of the trend.
“I'll give you some of the details,” Depaolo said. “One transaction was $209 million. It was composed of 86 buildings and we did 49 loans for purchasing the 86 buildings, for a total of $209 million. The other transaction was $241 million, where there were 36 buildings where we financed 29 loans to help our client purchase the 36 buildings. So there were two large transactions totaling $450 million.”
So hot now is the push to lend, that some pricing in those large markets is starting to attract notice, said Rene F. Jones, CFO of M&T Bank.
“The thing that does bug us a little bit is in some places, pockets, you just see (lending) behavior that, quite frankly, the loan pricing didn’t make sense - and it wouldn’t have made sense back in 2005 before we had the higher liquidity,” Jones said. “You see it in some of the smaller firms who were not necessarily accounting for those types of things.”
It is a factor that could dampen CRE loan growth, he said.
“If you go back maybe a year ago, maybe 1.5 years ago, all that during that period, [New York] was the one place where pricing was very, very rational. There were actually only a few players and the behavior seemed to be maybe the most rational in all of our footprint,” Jones said. “Now you’re seeing, again, the conduits are re-surging. You’re seeing insurance companies come in. And in the past quarter, it was a space where there were a lot of examples of just longer structures, seven years plus, and very, very thin pricing.”
Jones said M&T Bank has decreased its CRE loan portfolio in New York last quarter but has been expanding in surrounding markets, including Tarrytown, NY; Philadelphia and New Jersey. Overall CRE lending has picked up 2%.