commercial real estate (cre) – risks and effective risk
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Commercial Real Estate (CRE) –Risks and Effective Risk Management
July 21, 2016 New York Region Industry Teleconference
FEDERAL DEPOSIT INSURANCE CORPORATION
Nationwide, CRE Trends are Positive with Some Signs of Emerging Risk
CRE market conditions continue to improve
CRE lending has increased, but concentrations are below those of the bubble years
The multifamily market has seen a lot of construction and some areas may be approaching oversupply
Loan underwriting standards have relaxed, which may continue as competition increases
2Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
CRE Concentrations are High in Several Areas of the Country
Source: FDIC.Note: Data as of March 31, 2016.
Nation 176%
Median CRE Concentration
0-100%100 – 176%176 – 300%> 300%
3Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
CRE Past-Due Rates are Higher Than the Nation in Many Eastern States
Source: FDIC.Note: Data as of March 31, 2016.
Median CRE Past Dues
0-0.5%.5 – 0.76%.76 – 1.5%> 1.5%
Nation 0.76%
4Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
Foreign Capital Flows in U.S. CRE
0
20
40
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80
100
120
Latin America Australia
Mid-East & Africa Asia
Canada Europe
$ Billions
Strong Inflows from Abroad Continue
Source: Real Capital Analytics. Updated June 23, 2016.
5Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
Valuation Pressures are Increasing
Commercial property values have recently exceeded pre-crisis peaks Despite positive rent growth, net operating income has not kept pace with price
appreciation, pushing capitalization rates below pre-crisis troughs
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1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
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1Q14
1Q16
Retail Office Industrial ApartmentSource: CoStar Portfolio Strategies, data are as of First Quarter 2016. Constant quality price index, 4Q08 = 100.
CRE Prices
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1Q00
1Q02
1Q04
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Retail Office Industrial Apartment
Source: CoStar Portfolio Strategies, data are as of First Quarter 2016.
Capitalization Rates
6Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Multifamily (Apartment)OfficeRetailIndustrial
Actual ForecastVacancy Rate (Percent)
Recession
CRE Vacancy Rates are Improving but Multifamily May Face Some Weakness Ahead
Source: CoStar Portfolio Strategies. Data as of March 31, 2016.
7Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
Price Appreciation is Expected to Ease
Source: CoStar Portfolio Strategies. Data as of March 31, 2016.Note: Price growth is based on CoStar constant quality sales index.
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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Multifamily (Apartment)OfficeRetailIndustrial
Actual ForecastPrice Growth, Year-over-year percent
Recession
8Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
Who Holds Multifamily Loans?
Source: Federal Reserve Board, Flow of Funds Z.1, Table L219, June 9, 2016.Note: Data as of March 31, 2016.
Total $ in BillionsDebt Outstanding by Holders of Credit Risk
9
Government Sponsored Enterprises (GSEs)$47343%
Banks and Thrifts$38935%
State and Local CreditAgencies
$958%
Other$373%
LifeInsuranceCompanies
$636%
CMBSIssuers$575%
Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
Multifamily Property Supply has been Expanding Rapidly
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1Q02 3Q05 1Q09 3Q12 1Q16
Four-Quarter Completions as a Share of Inventory (Percent)
Source: CoStar Portfolio Strategies. Note: Four-quarter completions are the sum of the most recent four quarters' completions as a share of the inventory one year earlier.
Multifamily (Apartment)
Industrial
Retail
Office
Recession
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1Q11 1Q12 1Q13 1Q14 1Q15 1Q16
Units Under Construction as a Share of Inventory (Percent)
Source: CoStar Portfolio Strategies. Note: Units under construction are those due to be completed within six quarters.
Multifamily (Apartment)
Industrial
Retail
Office
10Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
New York Region Multifamily Supply is Also Increasing
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1Q02 3Q05 1Q09 3Q12 1Q16
Four-Quarter Completions as a Share of Inventory (Percent)
Source: CoStar Portfolio Strategies. Note: Four-quarter completions are the sum of the most recent four quarters' completions as a share of the inventory one year earlier.
Multifamily (Apartment)
Industrial
Retail
Office
Recession0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1Q11 1Q12 1Q13 1Q14 1Q15 1Q16
Units Under Construction as a Share of Inventory (Percent)
Source: CoStar Portfolio Strategies. Note: Units under construction are those due to be completed within six quarters.
Multifamily (Apartment)
Industrial
Retail
Office
11Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
New Multifamily Units Underway Exceed Absorption
0
2
4
6
-0.5
0.0
0.5
1.0
1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17
Absorption/Stock (%, Left Scale)Completions/Stock (%, Left Scale)Vacancy Rate (%, Right Scale)
Actual Forecast
Source: CoStar Portfolio Strategies, first quarter 2016. Data represent the 54 largest markets nationwide.
12Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
Additions to Existing Multifamily Stock are Very Large for Some Metro Areas
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Source: CoStar Portfolio Strategies. Data are as of first quarter 2016.
Burlington, NCProvo, UTNashville, TNFort Myers, FLMcAllen, TXCharlotte, NCCorpus Christi, TX
13Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
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Units Under Construction as a Share of Inventory, Percent
Source: CoStar Portfolio Strategies. Data are as of first quarter, 2016.
Several Metro Areas in the New York Region are Also Adding Multifamily Stock
14Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
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Homeownership Rate (L)
Housing Affordability Index (R)
US Homeownership
Source: Census Bureau, National Association of Realtors, Haver Analytics.
Ownership Rate Housing Affordability Index
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90
100
110
120
130
140
150
1-4 Family Multifamily Residential
Loan Growth By Type
Source: Federal Reserve Board, Haver Analytics.
Index (2007=100)
Increases in Multifamily Reflect a Decline in Homeownership Rates and Affordability
15Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
Looking Ahead: CRE Issues to Watch
Rising interest rates may put pressure on CRE debt service and capitalization rates
Multifamily might be approaching the supply/demand equilibrium point in some areas –suggesting that prices may weaken and vacancy rates may rise Underwriting standards may continue to relax with increased competition
16Note: Information and comments are the opinion of the author, not the FDIC. This presentation and comments are not for attribution, quotation, or distribution.
FEDERAL DEPOSIT INSURANCE CORPORATION
CRE Risk Management Discussion Topics
Overview of existing and recent applicable regulatory guidance
Commonly identified risk management weaknesses
Stress testing/Sensitivity analysis
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FEDERAL DEPOSIT INSURANCE CORPORATION
FDIC Rules and Regulations Part 365 –Real Estate Lending Standards
Provides regulatory guidelines and expectations regarding:• Lending Standards and Policies• Risk Management• Governance• Maximum Loan‐to‐Values• Internal Reporting
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FEDERAL DEPOSIT INSURANCE CORPORATION
FDIC Rules and Regulations – Part 365Appendix A of Subpart A
Real estate policies should include:• Geographic areas in which the bank will lend• Diversification standards and limits by type and geographic market
• Prudent underwriting standards and exception monitoring
• Regular portfolio monitoring and timely reports to the Board
• Consideration of the need to avoid undue concentrations of risk
• Regular monitoring of market conditions
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FEDERAL DEPOSIT INSURANCE CORPORATION
December 5, 2006 Interagency Guidance
Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices
Frequently Asked Questions for CRE Concentration Guidance
• Identifies concerns with rising CRE concentrations• Provides an overview of regulatory expectations:
– Ongoing risk assessments– Effective risk management framework
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FEDERAL DEPOSIT INSURANCE CORPORATION
Effective Risk Management Framework
Board and Management Oversight Portfolio Management Management Information Systems Market Analysis Credit Underwriting Standards Portfolio Stress Testing and Sensitivity Analysis Credit Review
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FEDERAL DEPOSIT INSURANCE CORPORATION
Examples of Effective Risk Management
Adopt adequate policies, underwriting standards, risk management practices, and concentration limits
Develop appropriate lending, capital, and ALLL strategies Analyze global cash flows based on reasonable information Analyze markets and scenarios to quantify potential risk Implement management and Board reporting of strategies
and policies Analyze repayment capacity over the life of the loan Monitor supply/demand Conduct sufficient ongoing reporting to identify, measure,
monitor and manage concentration risk Perform appraisal reviews to ensure appropriate support
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FEDERAL DEPOSIT INSURANCE CORPORATION
December 18, 2015 FDIC Financial Institution Letter (FIL-62-2015)
Statement on Prudent Risk Management for CRE Lending• Concerns with weak risk management practices, high CRE exposures, and easing of underwriting standards
• Reinforces the need to maintain underwriting discipline and ensure prudent risk management practices to manage CRE lending risks
• Examiners will focus on the implementation of activities that identify, measure, monitor, and manage CRE concentration risks
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FEDERAL DEPOSIT INSURANCE CORPORATION
December 18, 2015 FDIC Financial Institution Letter (FIL-62-2015) (Continued)
• “In particular, the agencies will focus on those financial institutions that have recently experienced, or whose lending strategy plans for, substantial growth in CRE lending activity, or that operate in markets or loan segments with increasing growth or risk fundamentals.”
• Institutions with inadequate risk management practices may be asked to:• Develop improved practices,• Reduce risk tolerances in underwriting standards, and/or
• Raise addition capital to mitigate CRE risks.
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FEDERAL DEPOSIT INSURANCE CORPORATION
Most Commonly Identified CRE Risk Management Weaknesses
Absence of or Inadequate/Excessive Limits Inadequate Underwriting Activities/Loan Policy Exception Programs Lack of or Insufficient Stress Testing Inadequate Concentration Reporting/Board Documentation Inadequate Independence/Expertise of Appraisal Review Programs Insufficient Internal Loan Review of CRE Activities
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FEDERAL DEPOSIT INSURANCE CORPORATION
Most Commonly Identified CRE Risk Management Weaknesses (Continued)
Inadequate Consideration of CRE or Lack of Appropriate Independence in ALLL analysis Outdated Market Analysis/Inconsistent with Strategic Plans Ineffective Construction Loan Oversight Lack of Appropriate CRE Contingency Plans
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FEDERAL DEPOSIT INSURANCE CORPORATION
Risk Management Cycle
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Risk Identification
Risk Assessment
Risk Mitigation/ Controls
Ongoing Reporting/ Monitoring
FEDERAL DEPOSIT INSURANCE CORPORATION
CRE Stress Testing – 2006 Interagency Guidance
Key risk management elements include management information systems, market analysis, and stress testing.
The level of sophistication will depend upon the size and complexity of the institution.
Portfolio stress testing does not require the use of sophisticated portfolio models. Stress testing may be as simple as analyzing the potential effect of stressed loss rates on the bank’s CRE portfolio, capital, and earnings.
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FEDERAL DEPOSIT INSURANCE CORPORATION
Stress Testing Steps Commonly Used By FDIC-Supervised Banks
Portfolio Analysis/Segmenting
• Property Type • Industry • Purpose• Ownership/Operation• Location• Repayment Sources• Internal Risk Ratings• Loan Structure
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FEDERAL DEPOSIT INSURANCE CORPORATION
Stress Testing Steps Commonly Used By FDIC-Supervised Banks (Continued)
Market Analysis
• Published Research Data• Real Estate Appraisers and Agents• Property Taxing Authority• Local Contractors/Builders/Investors• Community Development Groups
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FEDERAL DEPOSIT INSURANCE CORPORATION
Stress Testing Steps Commonly Used By FDIC-Supervised Banks (Continued)
Select Most Appropriate Variable(s)
• Sales Prices • Vacancy/Occupancy Rates • Interest Rates• Changes to Zoning/Regulatory/Consumer Preferences
Determine Variable Change/Develop Scenario(s)
Measure Impact of Variable Change(s), Report Results, Review Findings
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FEDERAL DEPOSIT INSURANCE CORPORATION
Stress Testing Steps Commonly Used By FDIC-Supervised Banks (Continued)
Take Action(s), Such As:
• Continue As Is• Reduce Exposure • Enhance Monitoring and Reporting• Revisit Current Risk Tolerances• Increase ALLL, Capital, and Liquidity Levels• Review CRE Contingency Plan, Strategic Plan, etc.
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FEDERAL DEPOSIT INSURANCE CORPORATION
Stress Testing Steps – Example Overview
Conduct Portfolio Analysis/Segmenting• Non‐owner Occupied Commercial Office Buildings
Perform Market Analysis• Market Rents Stable and Vacancy Rates Expected to Increase
Select Most Appropriate Variable• Vacancy Rates
Determine Variable Change/Scenario• Most Likely and Downside Scenarios
Measure Impact, Report Results, Review Findings• Downside Scenario Revealed Significant Risks
Take Action• Maintain Exposure, Revise Plans, and Revisit in 6 Months
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FEDERAL DEPOSIT INSURANCE CORPORATION
Questions?
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FEDERAL DEPOSIT INSURANCE CORPORATION
Contact Information
DIR Regional Manager Cameron Taborctabor@fdic.gov
RMS Senior Examiner Gregory McCormickgmccormick@fdic.gov
NY Region Regulatory Teleconferencesnycalls@fdic.gov
Event Web Link: https://www.fdic.gov/news/conferences/NY/2016-07-21.html
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