Economy Watch: Lending Standards for CRE Tighten in Q1

The Fed's latest bank lending practices survey found most banks have tightened their standards on CRE loans in the first quarter, even though demand for these loans has strengthened at the same time.

The Federal Reserve released its April 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices on Monday, which found that a majority of banks tightened their standards on commercial real estate loans over the first quarter of 2016. Even so, the survey also indicated that demand for CRE loans had strengthened during the first quarter.

The survey didn’t ask lenders why they tightened CRE lending standards, but there are a few likely possibilities. One is that they’re more concerned about the economy than they were at the end of 2015, and worry that sluggish growth overall will slow down leasing and other forms of demand for CRE. Lenders might also be worried about overheating in certain markets, such as multifamily development.

A moderate faction of banks reported stronger demand for construction and land development loans and loans secured by nonresidential properties, while some also reported stronger demand for loans secured by multifamily residential properties. Meanwhile, nearly all foreign banks reported leaving CRE lending standards basically unchanged, while a significant fraction of foreign banks reported experiencing weaker demand for such loans.

In response to conditions in the CMBS market over the past six months, banks said they upped the volume of CRE loan originations while decreasing the volume of CRE loan securitization, the survey said. When asked about the anticipated large amount of CRE loans originated in 2006 that’s currently held in CMBS and which will need to be refinanced over the next six months, a good number of banks noted they expect standards for these refinancings to be somewhat tighter than the standards for other CRE loans.