By Ray Birch
AUSTIN, Texas—While credit unions are not large commercial real estate players, those cooperatives that are in this market may be particularly exposed to the growing problems within commercial real estate, according to New Vista Solutions, which is suggesting some strategies for helping CUs manage their way through this issue.
As CUToday.info has extensively reported, falling commercial real estate values are an increasing problem as many businesses either leave their rental space or downsize their corporate offices as staff work remotely from home. NCUA has told CUToday.info it is monitoring the issue, noting many credit union commercial loans are represented by 1-4 family homes.
“It appears that small banks and credit unions are particularly exposed here because of their size,” said New Vista Solutions President Gary Kasper. “They're not the big banks, and they are not as liquid as the major banks. As a result, I believe they are more heavily exposed in this market.”
What the Data Show
Kasper cited data that show smaller banks are more exposed in the commercial lending sector, with the portfolio accounting for 40% of their total lending—compared with 13% for larger banks. According to Morgan Stanley analysts, approximately $1.5 trillion of commercial lending debt will be due for repayment by the end of 2025, Kasper noted.
Kasper added that analysts believe most lenders will modify existing loans rather than take back property in a bad market. He pointed out that credit unions typically are very relationship oriented, which could create some greater risks.
“Therefore, they might make more concessions than the larger banks when making a commercial real estate loan,” said Kasper. “I think the big banks have been more rigid in their commercial lending policies.”
But Kasper said that by taking a proactive stance, leveraging real-time data, and fostering a collaborative approach with borrowers, smaller banks and credit unions can navigate the downturn in commercial real estate more effectively.
What Can Be Done?
“So, what can a commercial property owner do to help boost their property value and minimize their loss in revenue? One option is to consider looking at their green credentials and sustainability,” said Kasper. “Commercial tenants are increasingly more interested in energy efficiency, low carbon emissions and healthy working environments for their employees. Property owners who ignore these concerns will lose marketability to potential tenants, and subsequently, the market value of their property. Commercial property investors often consider ESG (Environmental, Social and Governance) factors when looking at risk versus growth opportunities in the commercial real estate market.”
Gary Kasper
Proactive Measures
According to Kasper, for the small- to mid-sized banking community, there are a few proactive measures that that can be taken to minimize risk:
- Collateral Evaluation. “Regularly reassess the value of the commercial property portfolio and consider asking for additional collateral to secure those loans that appear to be at high risk,” he said.
- Loan Restructuring. “Consider offering loan modifications that convert short-term loans to longer terms and possibly offer interest-only payments for five years. The goal is to relieve stress on the borrower and ultimately keep the loan in good standing.”
- Diversify Portfolio. “This might be a good time to back away from commercial lending for a period of time, until the market trends toward more favorable conditions,” Kasper said.
- Open Communication Channels. “Encourage an open dialog with commercial borrowers. Demonstrate an understanding of their challenges and show a willingness to work toward a mutually beneficial solution.”
- Enhance Monitoring. Step up efforts to monitor borrowers who show signs of financial distress, allowing for early interventions that could prevent default,” he said.
- Promote Energy Efficiency. “Encourage property owners to retrofit buildings with energy-efficient improvements, which not only boost property value but also appeal to a growing segment of eco-conscious tenants.”
Increased Interest
“In this environment, New Vista Solutions continues to see increased interest from the lending community in ways to identify risk to their commercial portfolio through our comprehensive commercial product suite,” said Kasper.
Kasper noted the company has also partnered with IncentiFind.
“It is the nation’s largest and most complete database manager of government rebates available to property owners who build or upgrade commercial and residential property using energy-efficient and resilient materials,” he said. “New Vista also offers cost-effective AVMs and evaluation solutions for commercial lenders to obtain property value data quickly.”
Visit green.newvistasolutions.com and newvistasolutions.com/commercial-solutions for more information.