Standards on CRE Loans Tighten as Demand Weakens


The most recent iteration of the Federal Reserve Board’s Senior Loan Officer Opinion Survey (SLOS), which covers the fourth quarter of 2016, reports tightening of standards on multifamily residential and construction/land development loans. At the same time, demand, on net, also weakened.

Previous analysis documented the tightening of credit standards, a measure of loan supply, on commercial real estate (CRE) loans. In the current SLOS, a net share of banks continued to report that standards were tightening on these loan. The net share is the difference between the percentage of banks reporting that standards tightened over the quarter and the proportion reporting that standards had eased. At the same time, the current SLOS also found that a net share of banks thought that demand for CRE loans weakened on net. The net share represents the difference between the portion of banks reporting that demand had strengthened and the share of banks reporting that demand had weakened.

The figure above illustrates how net lending standards and net demand have moved over the past 2+ years. According to the chart, lending standards on multifamily residential debt eased on net over the second half of 2013 and the first quarter of 2014. Over the remainder of 2014 and the first half of 2015, standards were generally neutral, a small percentage of banks reported either tightening of easing during this time period. However, lending standards on net began to tighten dramatically in the third quarter of 2015. In recent quarters the pace of tightening has slowed, however a net share of banks on net continue to report tighter lending standards.

Meanwhile, over the period that lending standards were easing or neutral, demand for multifamily residential debt remained stronger, on net. However, as standards began to tighten over the second half of 2015, the pace of demand began to slow. In the most recent quarter, demand for multifamily residential debt weakened.

A somewhat similar narrative plays out in the supply and demand for construction and land development loans. However, lending standards were easing over the two years ending in the second half of 2015 before they began to tighten in earnest. The pace of tightening has eased a bit since its peak in the second quarter of 2016, but they continue to tighten on net. Previous analysis illustrated that the results from the SLOS on construction and land development loans is driven by dynamics in commercial construction loans because they account for a majority of the reference loan bucket.

Meanwhile, demand for construction and land development loans remained strong on net through the third quarter of 2016, though the pace of net demand slowed a bit over this period. After peaking at 45.7 percent in the first quarter of 2014, a smaller proportion of banks, on net, reported stronger demand. This level held stead until the fourth quarter of 2015. After a few quarters of improved demand, the proportion of banks reporting a decline in net demand for construction and land development loans began to decline and in the most recent quarter the proportion of banks reported that demand had weakened on net.

During the fourth quarter, banks, on net, also reported leaving lending standards basically unchanged on all categories of residential real estate home-purchase loans. Meanwhile, banks reported experiencing weaker demand for most categories of residential real estate mortgage loans. The weaker demand for retail mortgages may be related to the increase in mortgage rates that took place over the same period. However, it is too soon to tell whether this is a one-time occurrence or a trend response.


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