Commercial real estate investors in California may be interested to learn that the banking industry and real estate markets were not always as closely connected as they are today. Real estate loans made up just 25 percent of banking loans in 1955, and today real estate loans make up roughly half of all bank loans. At smaller banks, real estate loans are an even bigger percentage of loan portfolios, making up 75 percent of all banking loans.
With so much real estate lending, the health of the commercial banking system is closely tied to the ups and downs of the real estate market. Real estate assets are in general illiquid, and real estate prices can be very volatile. From the beginning of the housing crisis in December 2007 until 2012, the ratio of real estate loans to total loans played a major role in numerous commercial bank failures.
Between 2007 and 2012, some commercial banks increased the percentage of real estate loans from below 57 percent of total loans to over 72 percent of total loans. Banks that dramatically increased the number of real estate loans they gave out during this time tripled their risk of failure. About 60 percent of the bank failures that occurred in the aftermath of the real estate bubble involved banks that increased their real estate lending to over 83 percent of total loans.
Real estate prices have reached high levels again, and banks have loosened their real estate lending standards. However, banking regulators recently warned banks to take steps to mitigate risks associated with maintaining a high ratio of real estate loans to total loans. Commercial real estate developers may want to talk to a real estate attorney about trends in real estate lending that could affect their business.