The January 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve has the type of headline results for commercial real estate lending that you might expect: tighter standards and weaker demands across all CRE loan categories.
Those in the industry have reported slowing demand, higher financing costs, tightening standards, and lower leverage for months now. This is a look from the other side.
“Over the fourth quarter, major net shares of banks reported tightening standards for all types of CRE loans,” the Fed wrote. “Meanwhile, major net shares of banks reported weaker demand for loans secured by nonfarm nonresidential properties and construction and land development loans, and a significant net share of banks reported weaker demand for loans secured by multifamily properties. A moderate net share of foreign banks reported tighter standards for CRE loans, while a modest net share of foreign banks reported weaker demand for such loans.”
The survey asked a “special set of questions” about what banks expected to do regarding lending standards, borrower demand, and asset quality through 2023. Depending on the type of loan — construction and land development, nonfarm residential, and multifamily — the net percentage of domestic respondents planning to tighten standards even more for CRE loans varied from the high 50s (multifamily and non-residential) to about 70% (construction and land development).
The net percentage reporting stronger demand for commercial loans in these categories ran from about -50% (multifamily), just over -60% (construction and land development), and close to -70% (nonfarm residential).
A further look into this year came in answers to questions about outlooks for delinquencies and charge-offs. For construction and development loans, 81.8% of banks expected them to remain about the same; 18.2% said they would deteriorate somewhat. Similarly for multifamily, 84.6% said they would remain around current levels and 15.4% said they would deteriorate somewhat. A somewhat more negative view existed for nonfarm nonresidential properties, with only 64.3% expecting the outlook for delinquencies and charge-offs to remain about the same and 35.7% saying they would deteriorate somewhat.
And given the following question — “Assuming that economic activity progresses in line with consensus forecasts, how does your bank expect demand for the following categories of commercial real estate loans from your bank to change over 2023 compared to its current level, apart from normal seasonal variation?” — when it came to construction and land development loans, 10% said strengthen somewhat, 70% said remain unchanged, and 20% said weaken somewhat.
For nonfarm nonresidential properties, 8.3% said strengthen somewhat, 75% expected things to be largely unchanged, and 16.7% to weaken somewhat.
For multifamily residential properties, the answers were 9.1% strength somewhat, 81.8% remain the same, and 9.1% weaken somewhat.
Source: “Fed Reports Tighter Standards and Weaker Demand for CRE Loans“