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For First Time in 3 Years, Banks Ease Lending Standards for Commercial Real Estate Loans

The One Exception: Banks Continue to Tighten Grip on Multifamily Loans
May 16, 2018
For the first time in nearly three years, U.S. banks are reporting that they have loosened their lending spigots for some types of commercial real estate loans during the first quarter of this year.

The Federal Reserve’s quarterly survey of senior loan officers released this week found that banks are easing standards and terms on commercial and industrial loans to large and middle-market firms, while leaving loan standards unchanged for small firms. Meanwhile, banks eased standards on nonfarm nonresidential loans and tightened standards on multifamily loans. Lending standards on construction and land development loans were left unchanged.

The April 2018 Senior Loan Officer Opinion Survey on Bank Lending Practices also included a special set of questions intended to give policy makers more insight on changes in bank lending policies and demand for commercial real estate loans over the past year. In their responses, banks reported that they eased lending terms, including maximum loan size and the spread of loan rates over their cost of funds.

Almost all banks that reported they had eased their credit policies cited more aggressive competition from other banks or nonbank lenders as the reason. A significant percentage of banks in the survey also mentioned increased tolerance for risk and more favorable or less uncertain outlooks for property prices, for vacancy rates or other fundamentals, and for capitalization rates on properties for easing these credit policies over the past year.

A modest number of domestic banks indicated weaker demand for loans across the three main commercial real estate categories, citing a reduced number of property acquisitions or new developments, rising interest rates, and shifts of customer borrowing to other bank or nonbank sources.

Reports of reduced loan demand coincided with the latest CBRE Lending Momentum Index, which tracks the pace of U.S. commercial loan closings. The index fell by 8.8% between December 2017 and March 2018.

"Despite an increase in financial market volatility, real estate capital markets remain in good shape and the supply/demand balance for commercial mortgage lending is favorable to borrowers," said Brian Stoffers, CBRE's global president for capital market debt and structured finance, said in a statement accompanying the index.

"An unanticipated uptick in wage inflation may prompt the Fed to enact additional rate hikes, while the recent 3% breach of the 10-year Treasury could signal a sign of inflation that would result in a more typical yield curve. Nonetheless, all-in financing rates are likely to remain favorable near-term," Stoffers added.

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