Namely, Fitch believes banks have tightened their lending standards for construction. The reason for this is twofold: their experience in the last crisis and new regulations that require them to hold additional capital on loans for highly leveraged construction projects.

However, Fitch also noted that there has been a recent expansion in construction lending at some banks. In Fitch's view this is not necessarily good, at least not for the banks in question, as “we believe adds to risks, especially considering current CRE market conditions and valuations of completed projects.”

New Lending Opportunities Are Hard to Resist

Fitch began its analysis with the observation that commercial real estate valuation and lending trends are not sustainable in the medium term and banks should expect a softening of the CRE market. And indeed, CRE lending growth over the past five years has been strong with a CAGR of 3.7%, exceeding GDP growth. (Multifamily lending, the main driver within the CRE category, posted a CAGR of 10.7%.)

As the market softens, most but not all banks should theoretically scale back — and indeed many will. But new opportunities beckon and banks will keep their hand in this asset class, Fitch concludes. It writes:

A $205 billion wall of maturing loans from CMBS conduits originated in 2006 and 2007 creates the potential for further CRE lending growth through 2017. Given the soft CMBS market and the imminent introduction of rules that require issuers to retain a 5% stake in the CMBS transactions, we expect banks, insurers and other market participants to refinance many of these loans.

However, it stated, “outsized growth in CRE loans is likely to be credit negative” for many banks.

WASHINGTON, DC–Banks tightened lending standards on commercial real estate loans in the third quarter, according to the Federal Reserve's October 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices. It noted that:

a moderate net fraction of banks reported tightening standards for loans secured by nonfarm nonresidential properties, whereas significant net fractions of banks reported tightening standards for construction and land development loans and loans secured by multifamily residential properties.

Foreign banks are also tightening the lending standards, according to the survey with “a moderate net fraction” of foreign banks reporting this and a significant net fraction of foreign banks reported experiencing stronger demand for such loans.

Changing Demand

The survey also noted a slight shift in demand for CRE loans, with a “moderate net fraction” of banks reported stronger demand for construction and land development loans, while demand for loans secured by multifamily residential and nonfarm nonresidential properties remaining basically unchanged on net.

Separately, Fitch Ratings weighed in with its own analysis of the bank lending environment for commercial properties. It came to a similar conclusion, albeit with some nuance.

Namely, Fitch believes banks have tightened their lending standards for construction. The reason for this is twofold: their experience in the last crisis and new regulations that require them to hold additional capital on loans for highly leveraged construction projects.

However, Fitch also noted that there has been a recent expansion in construction lending at some banks. In Fitch's view this is not necessarily good, at least not for the banks in question, as “we believe adds to risks, especially considering current CRE market conditions and valuations of completed projects.”

New Lending Opportunities Are Hard to Resist

Fitch began its analysis with the observation that commercial real estate valuation and lending trends are not sustainable in the medium term and banks should expect a softening of the CRE market. And indeed, CRE lending growth over the past five years has been strong with a CAGR of 3.7%, exceeding GDP growth. (Multifamily lending, the main driver within the CRE category, posted a CAGR of 10.7%.)

As the market softens, most but not all banks should theoretically scale back — and indeed many will. But new opportunities beckon and banks will keep their hand in this asset class, Fitch concludes. It writes:

A $205 billion wall of maturing loans from CMBS conduits originated in 2006 and 2007 creates the potential for further CRE lending growth through 2017. Given the soft CMBS market and the imminent introduction of rules that require issuers to retain a 5% stake in the CMBS transactions, we expect banks, insurers and other market participants to refinance many of these loans.

However, it stated, “outsized growth in CRE loans is likely to be credit negative” for many banks.