From a risk-management and capital perspective, institutions should generally focus on the emerging conditions in their real estate markets and on the potential cumulative impact on their portfolios if conditions deteriorate, and they should take other measures to help identify CRE vulnerabilities. Of course, these measures should vary according to the size of the organization and the level of the concentration.
All of these steps are key elements of a sound strategy to manage concentrations. In evaluating the impact of their CRE concentrations, bankers should also pay attention to geographic factors. Many banks conduct successful CRE lending within a certain geographic area, but problems can arise when banks begin to lend outside their market or “footprint,” where they normally have better market intelligence.