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Borrowing Standards Ease Slightly as Banks Step Up Their Commercial Real Estate Lending

Latest Surveys from the Fed, American Bankers Association Cite Aggressive Competition for Loosened Underwriting
August 8, 2018
Aggressive competition among lenders to fund commercial real estate has pressured domestic banks to ease their current levels of lending standards from a year ago, according to the Federal Reserve's latest quarterly Senior Loan Officer Opinion Survey on bank lending practices.

The survey also found that the looser underwriting standards were particularly true for loans backing non-residential commercial properties, with bankers reporting they have eased their standards for two consecutive quarters.

However, the survey found that lending officers believe the levels of standards on most major categories of commercial real estate loans are still at the relatively tighter ends of the ranges that have prevailed since 2005. That was particularly true for construction and land development purposes and on loans secured by multifamily residential properties.

Responses to the survey were provided by loan offers at 72 domestic banks and 22 U.S. branches and agencies of foreign banks with a combined $10.5 trillion in assets.

Of the banks that reported easing their standards, 33 cited increased competition from other banks or nonbank lenders was the primary reason. That is up from 22 banks that cited that reason in the fourth quarter of last year.

The next most cited reason was a more favorable economic outlook, coming from a dozen respondents - the highest number in the last four surveys.

Even with the generally looser lending standards for commercial property loans, a modest net share of domestic banks reported that they have tightened lending standards on loans secured by multifamily residential properties. The primary reason they cited was a reduced tolerance for risk due to a less favorable economic outlook.

On the demand side, a moderate net share of domestic banks indicated weaker demand for construction and land development loans and multifamily loans, respectively.

American Bankers Assn. Survey Confirms Findings

With the commercial property lending market currently booming, banks are increasing their loan concentrations in this area - particularly in construction lending - according to findings from the 2018 Commercial Real Estate Lending Survey conducted by the American Bankers Association, also released this week.

The most active lending classes were multifamily (which accounted for an average of 23 percent of banks' commercial property portfolios), followed by retail (18 percent) and office (17 percent).

Meanwhile, a large majoority of respondents, 79 percent, said they anticipate increasing their capital concentrations, with the majority citing "market conditions and/or demand" as the main driver for that increase.

In addition, as indicated by the Federal Reserve survey, lenders reported to the American Bankers Association that competition from bank and nonbank lenders, as well as regulatory burden and requirements, were the top challenges they faced.
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