SLOOS: CRE Lending Standards Ease, But Mostly At National Banks

The Federal Reserve Board recently released its quarterly survey of senior bank loan officers. The standard questions asked by the survey address changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months. The most recent survey results indicate that a moderate fraction of banks had eased their standards for approving applications for commercial real estate (CRE) loans over the second quarter. About half of the banks, on net, reported that they had experienced stronger demand for such loans.

The July 2013 iteration of the Senior Loan Officer Opinion Survey also included a special set of questions on changes in lending standards and demand over the past twelve months for construction and land development loans as well as loans secured by multifamily residential properties, two major categories of CRE loans. According to the survey results, lending standards reportedly eased while demand strengthened. However, for these two types of CRE loans, the net share of banks reporting a strengthening in demand exceeded the reported fraction of banks easing their lending standards. A net fraction of 13% of banks reported their lending standards on construction and land development loans eased over the past year while a net percentage of 33% reported easing lending standards on loans secured by multifamily residential properties. Meanwhile, 42% of banks on net reported stronger demand for construction and land development loans and 53% of banks reported stronger demand for loans secured by multifamily residential properties, on net.

Presentation1

Although banks reported easier lending standards overall, the net proportion of banks easing their standards lagged the net share of banks reporting stronger demand. The smaller share of banks reporting easier lending standards over the past year largely reflects a small net percentage of “other banks” easing their lending standards. “Large banks” reported having eased lending standards in greater proportion relative to their “other bank” peers. According to the survey, large banks refer to large, national banks while other banks encompass large but regional banks.  As chart 2 illustrates, a net of 24% of large banks reported having eased credit standards on construction and land development loans over the past year while 54% of large banks eased standards on loans secured by multifamily residential properties, on net. In contrast, a net of 0% of large regional banks reported having eased their lending standards on construction and land development loans while 11% of these banks reported easier lending standards on loans secured by multifamily residential properties.

Presentation2

However, strong demand for these loans was reported by banks across geographic concentration.  Chart 3 portrays these results. According to this chart, a net fraction of 38% of large national banks reported stronger demand for construction and land development loans over the past year while a net of 54% reported stronger demand for loans secured by multifamily residential properties. Similarly, a net of 46% of large regional banks reported stronger demand for construction and land development loans while 51% of these banks reported stronger demand for loans secured by multifamily residential properties, on net.

Presentation3

Overall, a net fraction of banks have reported easier lending standards and stronger demand for both construction and land development loans as well as loans secured by multifamily residential properties. However, eased lending standards are largely occurring at large national banks. Fewer large regional banks on net reported that their lending standards eased over the past year. Meanwhile, all banks, regardless of the size of their geographic concentration reported stronger demand for these loan products. These results confirm similar findings by NAHB’s AD&C Financing Survey. Many homebuilders are more likely to seek financing from regional banks than national ones. As a result, results from the Senior Loan Officer Opinion Survey indicate that CRE lending conditions continue to be a headwind to new home construction.



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