Banks Report Tightening CRE Loan Standards
More banks continue to tighten their commercial real estate lending standards, the Federal Reserve reported.
The Federal Reserve Board of Governors’ Senior Loan Officer Opinion Survey on Bank Lending Practices found tightening in bank commercial real estate lending and weakening demand during the second quarter, especially in construction and multifamily lending.
The Fed surveyed 76 domestic banks and 22 U.S. branches of foreign banks.
“On net, domestic survey respondents indicated that their lending standards for all major categories of commercial real estate loans tightened during the second quarter,” the Fed report said. “In particular, a moderate net fraction of banks reported tightening standards for construction and land development loans and loans secured by multifamily residential properties.”
The Fed noted that banks also reported weakened demand for commercial real estate loans during the second quarter. “Meanwhile, a modest net share of foreign banks reported tightening standards for commercial real estate loans,” the report said. “Also, in contrast to the domestic respondents, a significant net share of foreign banks indicated that demand for commercial real estate loans strengthened in the second quarter of 2017.”
Wells Fargo Securities Senior Economist Anika Khan called the softer results “consistent with commercial real estate fundamentals.” In a special report, CRE Lending Standards Remain Tight in Q2, Khan said senior bank loan officers gave reasons for tightening including anxiety about the outlook for asset prices, capitalization rates, fundamentals and a reduced tolerance for risk. “We also suspect the commercial real estate regulatory environment is also playing a role, especially for construction loans,” she said. “A significant net share tightened by increasing spreads, lowering loan-to-value ratios and raising debt service coverage ratios, especially in multifamily and construction.”
CoStar, Washington, D.C., noted the net share of banks reporting tightening standards for all commercial real estate loan types relative to the previous quarter began in second-half 2015, which it called consistent with the peak in year-over-year apartment asking rent growth.
“Weaker demand for commercial real estate loans was also reported during the second quarter,” Khan said. “A modest net fraction of banks cited weaker demand for construction and land development loans and multifamily residential properties, while demand for income-producing loans like office and retail, remained largely unchanged on net.”
