CRE Has Seen Credit Tighten. Will It Spread to the Other Businesses?

Everyone in CRE knows that a credit crush has been developing. The Federal Reserve’s ongoing increases of the benchmark federal funds rate has pushed up short-term rates, affecting construction and bridge loans. Refinance costs have been on the rise while banks tighten their terms. Quantitative tightening has also had a dampening effect on MBS, CMBS, and CMO markets.

The question is whether the Fed’s efforts to reduce inflation might have started a credit crunch on its way to the rest of the economy, as part of the debate over whether there would be a soft landing or some degree of crash. And whether that would have a negative impact on the businesses and consumers who pay the rents that provides the revenue to the CRE industry.

St. Louis Federal Reserve Bank President James Bullard noted in a speech to the Arkansas Bankers Association a return of financial stress to banks. He listed as evidence Signature Bank, Silicon Valley Bank, and Silvergate Capital being closed, and Credit Suisse being sold with Swiss government assistance to UBS. He didn’t mention First Republic Bank’s rescue by 11 major banks providing deposits to ensure liquidity.

“Only about 20% of lending is going through the banking system and only a fraction of the banks are small or regional banks,” Bullard said, as reported by MarketWatch. “I just don’t think it is big enough by itself to send the U.S. economy into recession.” He doubted small and medium-sized banks would pull back on lending because there is an ongoing demand for loans.

Perhaps, but if not enough alone, it could become an aggravating factor, further constricting economic activity. The Fed’s most recent Beige Book suggested that credit feeling an impact nationally. “Several Districts indicated that high inflation and higher interest rates continued to reduce consumers’ discretionary income and purchasing power, and some concern was expressed about rising credit card debt,” the report said. “On balance, loan demand declined, credit standards tightened, and delinquency rates edged up.”

The American Bankers Association also sees slowing economic growth to tighten credit conditions.

“ABA’s latest Credit Conditions Index recognizes that recent strong credit quality will be challenged by heightened uncertainty and broader economic headwinds this year,” said ABA Chief Economist Sayee Srinivasan in the report. “Lenders are responding with cautious and prudent underwriting.”

Members of the association’s Economic Advisory Committee “expect credit availability to deteriorate more than credit quality, though almost all expect both to decline” and that consumer and business credit conditions will weaken over the next six months.