03/05/2012 | by
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Banks in the United States have increased their lending to commercial real estate projects, according to an analysis of lending and default statistics from the fourth quarter of 2011.

This marked the first time that bank lending has spiked upward since the first quarter of 2010, according to Sam Chandan, president and chief economist at Chandan Economics, which performed the analysis.

"It is the most encouraging set of results we have seen for the banks in some time," Chandan said. He added that banks' commercial real estate balance sheets expanded by more than $5 billion during the fourth quarter, with most of the increase in multifamily and commercial property loans.

The trend is evident across a range of banks, according to Chandan. In the fourth quarter, nearly 60 percent of the largest segment of banks in the study - those with $1 billion or more in net loans and leases and at least $100 million in commercial real estate loans - increased their exposure to commercial real estate.

Chandan said that while lending has improved, the larger commercial real estate markets will continue to capture a disproportionately greater share of the benefits. Additionally, banks with lower default rates on legacy commercial property loans have shown that they're more likely to increase their lending.

"Conversely, banks with higher default rates continue to draw down their exposure to commercial property," he said.

In another positive sign for the commercial real estate industry, the default rate on loans fell to its lowest level since the third quarter of 2009. The default rate dropped from 4.41 percent in 2009 down to 3.76 percent in the fourth quarter of 2011.

"Supporting banks' reengagement with borrowers, legacy loan performance continues to improve, easing institutions' capital regulatory demands," Chandan said.

Although the default rate has dropped, Chandan said bank default rates are still considered high when compared to the time frame leading up to the financial crisis.

Obstacles to increasing their lending levels remain for smaller banks, Chandan said. Distressed properties will pose problems for banks in smaller markets, where property values have been slower to recover than has been the case in major markets.

"The financing outlook for smaller markets is improving, but remains reserved," he said.