Economy Watch: CRE Benefits from Easier Money
- May 05, 2015
Among all the other metrics the Federal Reserve tracks, each quarter it publishes the “Senior Loan Officer Opinion Survey on Bank Lending Practices.” In the case of the April 2015 survey for Q1, the central bank summarized responses from 76 domestic banks and 23 U.S. branches and agencies of foreign banks. Regarding commercial real estate lending, the survey respondents (on the whole) reported easing standards on loans secured by nonfarm, nonresidential properties during the first quarter. A few large banks also said they’d eased standards on construction and land development loans, and some reported easing standards on loans secured by multifamily properties. On the demand side, the respondents reported stronger demand for all categories of CRE loans.
The April survey included a set of special questions (repeated annually, with some differences, since 2001) asking about changes in specific lending policies for CRE loans over the past year. For instance, some banks reported that, over the past 12 months, they’ve eased spreads, increased maximum loan sizes, and increased the maximum maturity on such loans; others reported that they’ve increased market areas served. By contrast, survey respondents didn’t report many changes in other loan terms, such as loan-to-value ratios and debt service coverage ratios. Several foreign respondents reported decreasing spreads over the past year, while few reported changes in other terms.
The Fed asked banks to rank the top four reasons for their changes in lending policies. Both domestic and foreign banks pointed to more-aggressive competition from other banks or nonbank lenders, and more favorable (or less uncertain) outlooks for vacancy rates or CRE property prices. Finally, banks were asked how they expected the pace of CRE loan originations during 2015 to change compared to 2014. Some domestic banks and a few foreign banks expected an increase in the pace of CRE originations. Also, domestic banks expected the pace of one- to four-family residential construction loans to increase somewhat during 2015 compared with 2014. The expected pace of originations for other categories of CRE loans were unchanged for both domestic and foreign respondents.
The survey also asked a set of special questions about lending to businesses in the oil and natural gas drilling or extraction sector. It’s clear that banks who do any significant amount of lending in that sector of the economy have been around the block a few times, meaning that — like everyone else involved in energy — they know all about the cyclical nature of the industry, which is arguably more extreme even than the real estate industry. In any case, banks said they expected delinquency and charge-off rates on such loans to deteriorate over 2015. But they noted that their exposures were relatively small, and that they were doing what they needed to do to mitigate the risk of loan losses. Of the banks that made loans to such firms, more than 80 percent said that such lending accounted for less than 10 said of their commercial and industrial loans outstanding.