US banks active in lending against warehouse and industrial real estate properties ramped up their exposure to the property sector significantly year over year as of Sept. 30.

Investors' generally bullish view on industrial real estate in recent years, driven by the rise of e-commerce, has lost some steam in recent months amid worries about consumer spending and the potential for a recession.

In an Oct. 16 note, BMO Capital Markets real estate investment trust analysts said industrial property owners' "enviable position of strength" at the beginning of 2023 has weakened as a result of economic uncertainty, while third-quarter net absorption in the sector — a measure of tenant demand relative to supply — was the weakest since the first quarter of 2011.

However, industrial lending remains a relative safe haven for banks paring back their exposure to office properties, a core commercial real estate (CRE) sector that has faced stronger headwinds amid persistent work-from-home trends.

Top lenders

Wells Fargo & Co., which has the largest disclosed warehouse and industrial loan book among US banks, raised its exposure by 25.4% year over year as of Sept. 30, according to S&P Global Market Intelligence data. Bank of America Corp., the second-leading lender in the sector, raised its exposure by 12.8% year over year.

Industrial and warehouse loans make up a relatively small percentage of gross loans at Wells Fargo and Bank of America: 2.6% and 1.4%, respectively. Several banks with a greater concentration in the sector also increased their exposure, including Heritage Financial Corp., where loans in the sector rose 9.7% year over year to account for 13.3% of gross loans. At First Busey Corp., industrial and warehouse loans rose by 11.1% year over year to account for 9.1% of total loans as of Sept. 30.

CVB Financial Corp., where industrial and warehouse loans were 25.7% of gross loans at Sept. 30, reported a 3.3% year-over-year increase in exposure to the sector.

At Commerce Bancshares Inc., loans in the sector increased 87.5% year over year, while at Pinnacle Financial Partners Inc., they rose by 53.5%.

Pinnacle Financial CFO Harold Carpenter said in an Oct. 18 earnings conference call that the quarter's results reflect a "slightly more conservative appetite" for industrial and multifamily loans compared to the past few quarters.

Other lenders with sharp year-over-year increases included Prosperity Bancshares Inc., with a 35.7% gain, and BOK Financial Corp., with a 29.8% ramp-up in exposure.

Mixed outlook

Observers of industrial real estate see mixed signals moving forward. In an Oct. 20 note, Morgan Stanley analysts observed rising concerns of slowing demand and rent growth in the sector. Prologis Inc., the largest publicly traded company in the sector, predicts that new supply will outpace demand over the next three quarters before that trend reverses in the following three quarters, they wrote.

Wedbush analysts argued in an Oct. 22 note that the pace of new construction starts in the sector may be slowing — a positive sign for existing property owners — while there is ample room for rent growth beyond current levels. Despite some observers' concerns that the long-term rationale for warehouse sector growth is slowing, Wedbush sees positive forces driving online grocery shopping and recent retail sales data has been strong, they added.

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In an Oct. 25 earnings conference call, BOK Financial executives predicted a tempered approach to CRE lending, noting that their exposure to the sector is at the upper end of their target range.

"We expect that we still have room for modest growth in that next year, but it's not going to be at the double-digit rate that we've seen year over year in CRE so far," Mark Maun, the company's executive vice president for regional banking, said. "We are focused on multifamily and industrial. That's where the growth has been. We don't see those markets slowing down too much. We're not focused on retail and certainly not on the office piece."

Hope Bancorp Inc., where industrial and warehouse loans totaled 8.8% of gross loans at Sept. 30, bucked the general trend with a 1.3% year-over-year decline in loans to the sector.