In order to have a deeper understanding of banks’ lending practices, the Federal Reserve conducts frequent checks with them through the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). The most current survey’s short summary for commercial real estate is that increasingly stricter underwriting requirements should be anticipated in the future.
Furthermore, although relatively modest demand from borrowers is eventually anticipated to be supported by softening interest rates, that is unlikely to occur until May or June.
The research stated that during the fourth quarter, a considerable number of banks reported tightening their rules for all kinds of CRE loans. Tightening requirements, particularly by the “other banks” group, were also true for multifamily loans. “Such tightening was more widely reported by other banks [or those with less than $50 billion in assets] than by large banks.”
A substantial net share of banks reported weaker demand for construction and land development loans, and major net shares of banks reported weaker demand for loans secured by nonfarm, nonresidential, and multifamily residential properties, they continued. Over the course of the fourth quarter, notable net shares of foreign banks reported tighter standards and a decline in the demand for CRE loans.
The percentage of respondents who are tightening conditions for CRE loans is close to the 2009 peak of the global financial crisis and just below the peak of the 2020 pandemic. Furthermore, the percentage of domestic respondents who reported a higher demand for CRE loans is significantly lower than it was during the GFC.
Banks expect demand for loans to increase as interest rates decrease, but with Fed messaging, this is unlikely to happen until May or June at the earliest. Dave Sloan, a senior economist at Continuum Economics, told Reuters that the results are “unlikely to generate any urgency for easing.”
An expected decline in collateral values, a less favorable economic outlook, an expected decline in the credit quality of the bank’s loan portfolio, an expected reduction in risk tolerance, an expected decline in the bank’s liquidity position, and increased concerns about funding costs and the effects of legislative or regulatory changes were the most commonly cited reasons for expecting to tighten lending standards over 2024, according to major net shares of banks, the Federal Reserve stated.
In layman’s words, the problem is bank anxiety, which has persisted since the early 2023 closures of First Republic Bank, Silicon Valley Bank, and Signature Bank. The shares of New York City Bancorp, which acquired the majority of Signature’s assets, including its CRE loan portfolio, have continued to tumble for almost a week now. At the closing on February 6, shares had dropped about 60%, from roughly $10.30 to $4.20.
There were other issues plaguing the New York community than just Signature. Though they were all tied to commercial real estate, there was also an additional charge-off on an office loan that went non-accrual during the third quarter, based on an updated valuation, and a New York cooperative loan that wasn’t in default but is now up for sale due to a unique feature that pre-financed capital expenditures. Furthermore, if one bank trembles, so do many more.
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