Federal regulators are becoming alarmed at the rapid expansion of multifamily construction that is being fueled by bank lending.
"Multifamily might be approaching the supply/demand equilibrium point in some areas — suggesting that prices may weaken and vacancy rates might rise," the Federal Deposit Insurance Corp. warned in a presentation to bankers on Thursday.
The presentation, which was authored by the agency's New York regional office, highlights concerns about emerging risks.
"CRE lending has increased, but concentrations are below those of bubble years," the presentation said.
The FDIC appears to be concerned about high concentration levels of CRE loans on the books of mid-size banks, according to John Kanas, chairman and chief executive of BankUnited, which is based in Miami Lakes, Fla. The bank also has branch offices in New York.
"We are not seeing any evidence of deterioration," Kanas said Friday morning in an interview with Bloomberg-TV.
FDIC officials declined to comment for this story.
In December, federal regulators warned about credit and interest rate risk on multifamily loans. They also warned that high concentrations of commercial real estate loans on bank balance sheets, including multifamily loans, could lead to a greater risk of loss and failure.
But the warning did not have much of an impact. "The multifamily market has seen a lot of construction and some areas may be approaching oversupply" and the ability to absorb new units, according to the FDIC presentation.
In June, developers completed construction of 386,000 multifamily units, up 21% from a year ago.
However, multifamily starts have fallen nearly 24% from June 2015 to 392,000 in June of this year. But multifamily starts have been rising since February, according to the latest Census Bureau data.
The regulators attribute some of overbuilding to strong flows of investment from foreign countries.
Despite the regulators concerns, the 30-day to 89-day delinquency rate on multifamily loans is just 0.13% and 0.27% for CRE loans.
On one slide, FDIC points out that past-due rates on CRE loans are higher in many eastern states.
"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" according to the FDIC.
