Pub. 9 2019-2020 Issue 1

10 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S FEATURE ARTICLE Staying on top of these loans is key. It is important to remind the team to keep their eyes and ears open to avoid issues when the credit cycle eventually turns. BY MATT HELSING Managing Your Credit Risk T he current economic expansion cycle looks like it will be the longest recovery cycle in the U.S. ever, and we are un- doubtedly past the peak. Since we are in “uncharted territory,” there may be some unfamiliar (and un-tested) chal- lenges inmanaging credit risk. After all, no one knows when the cycle will turn, because no one has ever been here before. Regardless, it makes sense for bankers to be prepared. As things sit now, valuations are running high and cap rates are low. As of Q4 2018, REIS reports that the 10-year average cap rate for na- tional retail properties was 7.9%, whereas the mean retail cap rate was 7.5% in Q4 2018. Also, as of Q4 2018, REIS points out that the 10-year average cap rate for multifamily/apartments was 6.4%, whereas the mean multifamily cap rate was 5.4% in Q4 2018. Of course, geogra - phy, class and a host of other factors matter, but the gist of this discussion is there. Needless to say, as valuations continue to rise, regulators want banks to exercise more and more caution. Community banks know their commer- cial real estate markets deeply. Bankers are familiar with the various developing areas and how the local economy can impact them. But, in order to stay on top of subtle market changes, drive the neighborhoods every now and again and talk to local businesses. If you notice areas are becoming overvalued it may be time to pass on deals in that area. Ramp up discussions with brokers as well and ask them what they are seeing and hearing. All of these sources can provide your team with important insight and facilitate your bank’s preparations. Of course, bankers know they need to embed the level of risk into deal calculations. However, simply looking at each deal in iso- lation has holes. Without taking into consid - eration the current 10+ year economic cycle

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