Economy Watch: CRE Lending Standards Tighten in 4Q

The Federal Reserve's latest lending practices survey discusses what's in store for CRE loans in 2016.

In its January 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices, the Federal Reserve reported that lending standards for CRE loans of all types tightened during the fourth quarter of 2015. The Fed doesn’t posit reasons for this kind of tightening, but it’s possible lenders are responding to the potential for overbuilding of some product types (such as multifamily) in certain markets, or perhaps it’s jitters about a slowing U.S. economy.

In any case, a “significant fraction” of banks reported tightening standards for multifamily loans, while a “moderate fraction” tightened standards for construction and land development loans, and a “small fraction” tightened standards for loans secured by nonresidential properties, according to the report.

Regarding changes in demand, a “modest” number of responding banks said they’d experienced stronger demand for all types of CRE loans during the fourth quarter of 2015. Most lenders aren’t experiencing stronger demand, however. Meanwhile, nearly all foreign banks reported leaving CRE lending standards unchanged, while a “significant fraction” of foreign banks experienced stronger demand for such loans.

Overall, the survey addressed changes in the standards and terms on (and demand for) bank loans to businesses and households over the last three months of the year. The Fed surveyed 73 domestic banks and 24 U.S. branches and agencies of foreign banks.

The survey also asked some special questions, including banks’ outlook for lending standards this year. In the commercial real estate lending category, many banks expect to tighten lending standards further for all of the above kinds of commercial loans: multifamily, construction and land development, and loans secured by nonresidential properties.