M&T forecasts decline in commercial real estate lending as rates rise

Bank expects less development, fewer deals in second half of the year

M&T Bank Chief Financial Officer Darren King (M&T Bank Newsroom)
M&T Bank Chief Financial Officer Darren King (M&T Bank Newsroom, Illustration by The Real Deal with Getty)

Another day, another multifamily lender tightening its purse strings.

After its commercial real estate loan balances declined by 2 percent, or $830 million, in the second quarter, M&T Bank said it expects to extend fewer loans to the sector for the rest of the year, citing rising interest rates.

That forecast comes one day after Signature Bank, another top lender to the city’s multifamily landlords, said it would curb commercial real estate lending in the coming months to maintain a healthy loan-to-deposit ratio as rates continue to increase.

On an earnings call Wednesday, chief financial officer Darren King said M&T’s portfolio of construction loans declined during the second quarter as developers wrapped projects and fewer new developments came online.

“We continue to reduce our construction exposure because there’s a lack of new activity to offset the conversion of construction loans into permanent mortgages,” King said.

That slowdown in development may be a byproduct of the Federal Reserve’s interest rate hikes, which have driven up mortgage rates. The absence of the 421a property tax abatement for New York multifamily developers is also expected to limit new construction.

The abatement’s June 15 expiration triggered a rush of new building filings and construction starts as developers raced to make sure their projects would qualify, meaning any downturn in building could take a few quarters to materialize.

In the near term, M&T reported an uptick in permanent mortgages, but those gains were offset by a greater number of payoffs as clients used excess cash to settle their balances. All told, M&T reported a 38 percent dip in mortgage banking revenues for the quarter.

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King said fewer originations could be coming as borrowing grows more expensive.

“With rates moving, it’s affecting cap rates and asset values,” he said. “You’re not seeing the turnover in properties like you might have under normal circumstances.”

Rising rates also affected the bank’s residential mortgage portfolio, where revenue fell 34 percent to $50 million in the second quarter, as home loan originations slid by more than 50 percent.

M&T saw profits drop significantly in the second quarter, which it said was largely a result of expenses related to its merger with regional bank People’s United.

The bank reported diluted earnings per share of $1.08 in the second quarter, a 59 percent decline from the same period last year. Its shares held mostly steady in Wednesday trading, increasing less than 1 percent to $165.54.

The bank did report a 35.6 percent bump in revenues to just under $2 billion for the quarter. King attributed those gains to higher net interest margins. Going forward, continued growth will depend on the bank’s ability to keep making loans.

And is it stands, commercial and residential real estate, which comprise more than half of its lending portfolio, are expected to face continued headwinds.

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