Weaker Demand, Tighter Standards for CRE Loans in Q2

Domestic banks have reported tighter standards and weaker demand for all commercial real estate loan categories during the second quarter, according to a Federal Reserve survey of senior loan officers. However, the share of banks reporting stricter standards was lower than in the July 2023 study.

While a significant share of other banks reported tightening for all CRE loan categories, large banks reported lending standards were basically unchanged for all types of CRE loans, according to the survey. Meanwhile, a moderate share of banks reported weaker demand for all types of CRE loans.

Foreign banks also reported stricter standards for CRE loans, but unlike their domestic counterparts, foreign banks were more likely to report stronger demand for CRE loans during the second quarter.

Demand for commercial and industrial loans of all sizes was essentially unchanged for the quarter, the first time demand hasn’t weakened in two years. In addition, the number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines was basically unchanged as well, the survey found.

The most frequently cited reasons for strengthening demand were increased customer financing needs for inventory, merger or acquisition, and accounts receivable; increased investment in plant or equipment; and decreased internally generated funds by customers.

A modest share of banks reported tightening terms on C&I loans, pointing to a less favorable or more uncertain economic outlook, worsening of industry-specific problems, reduced tolerance for risk, and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards.

Over the second quarter, banks reported that lending standards were unchanged for all residential real estate loan categories and home equity lines of credit.