How Will Continued Bank Consolidation Impact CRE Lending? A Conversation with Josh Campbell, Managing Partner

Bank consolidation has been occurring at an accelerated pace in recent years, driven by increased regulatory requirements, changes in consumer behavior and market pressures. We sat down with Josh Campbell, Managing Partner at Four Pillars Capital Markets, to learn how this consolidation may impact lenders and investors in the future.

Can you share a quick history of bank consolidation in the U.S.?

Deregulation within America’s financial services sector began back in the 1980s. At that time, there were around 18,000 FDIC-insured commercial banks. Fast forward to today, and we have fewer than 5,000. During the financial crisis in 2008-2010, we saw roughly 1,000 local and regional banks consolidate. Since Trump-era deregulation rolling back portions of Dodd-Frank, the market again has seen a few both high-profile mergers, such as SunTrust’s mega-merger with BB&T to form Truist and PNC’s acquisition of BBVA, but more importantly accelerated acquisition of smaller regional banks.

What are your predictions for bank consolidation activity for the remainder of this year and into 2022?

Through Q3 2021, consolidation is running at a pace that is likely to exceed 2019’s recent high-water mark of $55 billion in merger and acquisition activity. This is fueled on the one hand by the low interest rate environment for the acquirer and on the other, by the steep investment requirements to scale in an increasingly digital banking environment for the smaller banks who are selling. With lingering impacts to property portfolios from the pandemic mostly in the rearview, valuations of community banks and forward-looking earnings have steadied, giving both buyers and sellers confidence to move forward with planned deal-making. Add to that historically low interest rates, which are fueling increases in valuations, and now is a great time to sell for many regional banks.

How does continued consolidation impact the commercial real estate market?

That is the trillion-dollar question that has caught the attention of many regulators and industry-watchers. Bank mergers have been associated with decreases in real estate development and small business lending, according to several studies, suggesting that new deliveries and renovations could slow in markets where consolidation is occurring. Additionally, commercial real estate investors know that larger banks tend to be more conservative on low credit tenants, while so-called “relationship banks” will often follow their clients for good deals and “story credit” assets. In the near term, there is likely to be little impact at a macro-level, but there may be implications in smaller markets that investors should pay attention to.

What does this do for competition in the lending markets and what do investors need to know?

In the short-term, there should be little reduction of competition for loans in primary and secondary markets. Interestingly, increased consolidation likely pushes more banks to compete for high-quality assets in those markets, keeping rates low in the near term. Over the intermediate and long term, the trend could decrease competition for loans on tertiary market assets, such as manufacturing hubs in small towns across the Midwest or Southeast. Knowledge of, and access to, the willing and available lenders – not just banks, but credit unions and alternative lenders as well – in tertiary markets will likely increase in importance for investors who have financed assets such as Dollar Generals or physician clinics in these markets.