Banks Tighten CRE Loan Standards Even More While Demand Weakens

The Federal Reserve, releasing the April results for the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), once again passed along what has become the banking industry’s standard response when it comes to commercial real estate: “Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate loan categories.”

For all CRE loan categories, banks reported having tightened all queried lending policies, including the spread of loan rates over the cost of funds, maximum loan sizes, loan-to-value ratios, debt service coverage ratios, and interest-only payment periods.

Meanwhile, a moderate net share of banks reported weaker demand for construction and land development loans, while significant net shares of banks reported weaker demand for loans secured by nonfarm nonresidential and multifamily residential properties.

Tight times, which, after so many repetitions as well as experience by the entire industry, isn’t nearly surprising. Here are some of the details for where changes are happening — mostly in banks outside of the largest:

• maximum credit line sizes
• costs of credit lines
• widening spreads of loan rates over costs of fund
• premiums on riskier loans

The big reason banks thought that there was less demand for CRE loans is, as one might have guessed, higher interest rates. Also mentioned, decrease in property development and customer acquisitions, as well as a less favorable outlook for rental demand.

Credit tightening doesn’t just affect commercial real estate directly. It has an impact on the businesses that need to lease space, so a significant indirect affect. “Regarding loans to businesses, survey respondents reported, on balance, tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes over the first quarter,” they wrote.

For that matter, “For loans to households, banks reported that lending standards tightened across some categories of residential real estate (RRE) loans while remaining unchanged for others on balance. Meanwhile, demand weakened for all RRE loan categories. In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Moreover, for credit card, auto, and other consumer loans, standards reportedly tightened and demand weakened.”

As credit tightens for everyone — which is what the Fed has tried to do to slow inflation — liquidity drops. The economy slows. Money to businesses from other businesses and consumers tightens. That eventually affects the companies and individuals that pay rents to property owners, increasing risk for the CRE industry.