Small-Balance Lending Rebounds

Tucker, Michael mtucker@mba.org

October 29, 2015


Originations for commercial real estate loans under $5 million rebounded in the second quarter, reported Boxwood Means, Stamford, Conn.

"Small-balance origination volume rose to its highest level in seven quarters," Boxwood Means Principal Randy Fuchs said.

Boxwood Means reported that small-balance commercial originations reached $44 billion during the second quarter, a 13.8 percent gain over the first quarter and a 1.9 percent increase year over year. First-half SBC originations totaled $82.7 billion, up 4.1 percent compared with the same six months of last year.

"While interest rates have ticked up since the beginning of the year, historically low debt costs have bolstered small-balance originations," Fuchs said.

The pace of refinance loans quickened. Refinance loans captured 68 percent of total quarterly originations with a volume of $30 billion, up from a 66 percent share and $25.7 billion during the first quarter.

Purchase loans increased by $1 billion to $14 billion due to the still-hot sales transaction market, but Fuchs said the share of acquisition loans dipped 200 basis points to 32 percent during the most recent period.

The Mortgage Bankers Association's most recent lender survey said general CRE originations market also advanced during the quarter. Overall commercial loan originations increased by 16 percent quarter-over-quarter and a robust 29 percent compared with the same period last year.

The top 15 small-balance lenders grabbed 21.3 percent of sub-$5 million originations during the quarter, up 20 basis points from the previous quarter "as these national and regional banks flexed some muscle in an increasingly price-competitive market," Fuchs said. Among the top small-balance lenders, J.P. Morgan Chase extended its lead with a 6.5 percent national market share, followed by Wells Fargo Bank (3.6 percent) and Bank of America (1.6 percent).

But in a larger trend, banks continue to shed small-balance real estate loans, Fuchs said: "Despite their dominance in the small-balance commercial space, commercial banks face increasing competition for smaller loans, especially from the growing herd of alternative and non-bank lenders. The trend of small business real estate loans within bank portfolios is declining--and seemingly irreversibly so."

The short-term outlook for small-balance commercial originations looks favorable, Fuchs said. "Capital market conditions suggest that only slight increases in interest rates--if any--will come into play and sustained access to financing and moderating underwriting standards will offer further encouragement to borrowers and investors," he noted.

As a result, Fuchs predicted that full-year 2015 volume will top the $164.7 billion generated last year, "but the record volume of $176.2 billion posted in 2013 may be harder to beat," he said.

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