Enhancing CRE Asset Management
Asset management and rigorous risk assessment have become more critical than ever in commercial real estate (CRE) lending. Recently, GoDocs’ Mark Rothschild attended the ABA Risk and Compliance Conference in Seattle, where he sat in on the “2024 Approach to Deepen Your Analysis and Managing CRE Assets” panel with Neena Miller, Chief Credit Officer at OceanFirst Bank, and John Markovich, Chief Credit Officer at FirstBank. During the panel discussion, both FIs shed light on the nuanced strategies community banks are adopting to navigate the complexities of the current market. Explore Mark’s comprehensive recap below, featuring market intelligence and industry perspective from GoDocs’ Vice President of Strategy & Partnerships, Ren Hayhurst.
Targeted Focus on Asset Classes and Sub-Sectors
Both Miller and Markovich emphasized the importance of closely monitoring specific asset classes and sub-sectors. At FirstBank, Markovich is keeping an eye on the office and life science sectors, noting the impact of market softening and the effects of oversupply in certain regions. Taking a hit-the-pavement stance, OceanFirst Bank has been closely watching their office book, going to many locations in person to get the best sense of occupancy and provide a more accurate picture of asset performance.
For both banks, a significant portion of their construction books involves multi-family projects, requiring meticulous oversight due to fluctuating costs and interest rates. With interest rates at 7-8% for loans maturing in the next 18 months, both OceanFirst Bank and FirstBank are preparing for potential market shifts to ensure resilience in their portfolios.
Market Insights
“We are seeing smaller commercial buildings, such as medical offices, exhibit higher resilience with a lower risk of default compared to larger developments. This stability makes them attractive assets for community banks, especially amidst softening markets for life science and traditional office spaces. Small commercial properties, with a default risk of around 5%, remain robust areas for community bank lending. Conversely, larger buildings, with a 25% default risk, present greater challenges, underscoring the need for meticulous asset selection and management.”
-Ren Hayhurst
GoDocs, VP of Business Strategies,
General Counsel
Commercial Lending Compliance on Autopilot
Don’t let compliance create delays in your lending process. Get our free whitepaper now and start easing the compliance burden with GoDocs.
Comprehensive Risk Management Strategies
Risk management remains a cornerstone for both FIs’ approach. Miller advocates for continuous stress testing, running multiple scenarios to preemptively identify issues and communicate them to borrowers. By using third-party software for data governance and portfolio monitoring, they maintain a comprehensive view of their performance metrics.
Alternatively, FirstBank takes a multi-layered approach involving deep dives with market presidents to understand regional performance variations. This granular analysis allows them to tailor their strategies to specific geographic contexts, enhancing their risk mitigation efforts.
The Stability of Community Banks
The stability of community banks, as highlighted by both lenders, is a testament to their rigorous loan review processes and proactive management strategies. Unlike larger institutions that may sell off underperforming loans, community banks maintain healthier portfolios through continuous oversight and early default intervention.
Market Insights
“Diligent data collection and governance enable lenders to spot potential issues early and work with borrowers to strengthen credit before defaults occur. This proactive approach decreases the need to sell underperforming assets, which helps to maintain the overall health and stability of a bank’s loan portfolios. In addition, using third-party loan and market tracking software, as well as conducting more frequent physical inspections of potentially risky collateral properties, enables lenders to monitor loan performance in their entire portfolio more closely and comprehensively.”
-Ren Hayhurst
GoDocs, VP of Business Strategies,
General Counsel
Market Dynamics and Competitive Pressures
Market dynamics are also influencing production volumes and competitive strategies. OceanFirst Bank has adjusted its goals to align with lower customer demand, particularly in commercial and industrial (C&I) loans. The intense competition from larger banks, which are offering more aggressive deal terms, poses a challenge for community banks to win new business profitably.
FirstBank is trending towards smaller deals with fewer syndications and participations, pointing out a trend of opportunistic investors eyeing delinquent office buildings. This cautious approach reflects the prudence with which community banks manage their portfolios.
Conclusion
The insights from Neena Miller and John Markovich highlight the strategic approaches community banks are employing to manage CRE assets effectively. Through rigorous stress testing, detailed portfolio monitoring, and proactive borrower communication, these FIs are navigating the current market landscape with agility and foresight. As competitive pressures build and market dynamics evolve, the diligence and stability demonstrated by community banks will be crucial in sustaining their success and supporting their communities.
Experience the Future of Commercial Loan Document Automation
Discover GoDocs, the leading SaaS solution powered by the sharpest legal minds in CRE! Schedule a demo today to elevate your lending process and to gain your competitive advantage.