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Banks Expecting More Tightening On CRE Standards

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The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) regularly checks with banks to better understand their lending landscape. The short take for commercial real estate from the most recent survey is that even tighter underwriting standards can be expected in the future.

And while easing interest rates are eventually expected to support relatively low demand from borrowers, that is unlikely to happen until May or June.

“Over the fourth quarter, significant net shares of banks reported tightening standards for all types of CRE loans,” the report noted. “Such tightening was more widely reported by other banks [or those with less than $50 billion in assets] than by large banks.” Tightening standards particularly by the “other banks” category were also true for multifamily loans.

 

“Major net shares of banks reported weaker demand for loans secured by nonfarm nonresidential and multifamily residential properties, and a significant net share of banks reported weaker demand for construction and land development loans,” they added. “Similarly, significant net shares of foreign banks reported tighter standards and weaker demand for CRE loans over the fourth quarter.”

The net percent of respondents that are tightening standards for CRE loans is a little shy of the 2020 pandemic peak and still near the 2009 apex of the Global Financial Crisis. Also, the net percent of domestic respondents reporting stronger demand for CRE loans is even worse than the depths after the GFC.

Dave Sloan, a senior economist at Continuum Economics, told Reuters that the results are “unlikely to generate any urgency for easing.” Banks expect demand for loans to increase as interest rates fall, but with signaling from the Fed, this is unlikely to happen until May or June at the earliest.

“The most frequently cited reasons for expecting to tighten lending standards over 2024, reported by major net shares of banks, included an expected deterioration in collateral values, a less favorable economic outlook, an expected deterioration in credit quality of the bank’s loan portfolio, an expected reduction in risk tolerance, an expected deterioration in the bank’s liquidity position, and increased concerns about funding costs and about the effects of legislative or regulatory changes,” explained the Fed.

More colloquially, at issue is fear on the part of banks, still around since the closuresof Signature Bank, Silicon Valley Bank, and First Republic Bank in the early part of 2023. Roughly a week after shares of New York City Bancorp — which bought most of the assets of Signature, including its CRE loan portfolio — started plummeting, they’re still in freefall. Shares went from about $10.30 or so to $4.20 at the close of Feb. 6, a drop of almost 60%.

The problems facing New York Community were more than Signature. A New York co-op loan that wasn’t in default nevertheless is now up from sale because of “a unique feature that pre-funded capital expenditures.” There was also an “additional charge-off on an office loan that went non-accrual during the third quarter, based on an updated valuation.” But they were all related to commercial real estate. And what rattles one bank rattles many more.

 

Source:  GlobeSt.

 

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Banks Expect To Tighten Standards For CRE Loans Even More

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A new Federal Reserve report noted that banks continue to get nervous overall and in particular about commercial real estate.

“Regarding loans to businesses, survey respondents reported, on balance, tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes over the second quarter,” the report said. “Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.”

The reactions to CRE lending was similar levels of tightening by large banks and others.

The July Senior Loan Officer Opinion Survey on Bank Lending Practices, or SLOOS, got responses from 66 domestic banks and 19 U.S. branches and agencies of foreign banks. Surveys went out on June 15, 2023, and were due back June 30, so all the data is more than a month old. It may be that conditions aren’t changing quickly enough to reduce the information’s meaning.

That said, according to the Federal Deposit Insurance Corporation (FDIC), as of the first quarter of 2023, there were 4,672 FDIC-insured institutions and 3,006 FDIC-supervised, so even though a concentration of the largest banks responding to the Fed’s survey might well be descriptive of that segment, the remainder isn’t nearly large enough for a comprehensive look at the banking industry.

The survey included two special sets of questions. One was about current lending standards compared to the midpoint of a range they have been in since 2005. The other question was bank expectations for changes in their standards in the second half of the year and the reasons for any change.

In the second quarter, “major net shares of banks” said they had tightened their standards on all categories of CRE loans. The same degrees of tightening were reported by large banks and other banks, though, again, without a representative sample, it’s impossible to say whether a majority of all banks were doing so.

Additionally, banks were largely reporting that there was weaker demand for all CRE loan categories. This was more pronounced in banks that were not the largest. Foreign-based banks reported similar responses on both questions.

According to the sample, standards tightening isn’t over. Major net shares of banks said they expect to tighten standards on construction and land development loans as well as on nonfarm, non-residential loans.

A moderate net share of banks said they would tighten standards on all residential real estate loan categories, including those that are GSE-eligible.

Also, the number of FDIC-insured and -supervised institutions in the first quarter of 2022 were 4,796 and 3,100 respectively. In the first quarter of 2021, there were 4,978 and 3,209. And in the first quarter of 2020, 5,116 and 3,303. While not a survey, the progression offers a partial different view of how the industry might be doing.

 

Source: GlobeSt.

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