Market Insights

Watch Out for Tighter CRE Lending Standards in 2018

Even after two years of tighter lending standards for commercial real estate, banks apparently don’t feel the belt is tight enough and expect to take it in another notch in 2018.

Lending standards are expected to tighten across all CRE loan categories this year especially for multifamily lending, according to the Federal Reserve’s latest Senior Loan Officer Opinion Survey on Bank Lending Practices.

“On balance, banks expect to tighten standards across all categories of CRE loans over 2018,” the Q1 2018 survey found.

That would continue the tightening trend first reported in Q4 of 2015.

An increasing share of U.S. banks reported tightening for construction and land development, up from 2.9% of domestic lenders surveyed in the Q4 2017 report to 11.8% in the current survey.

Continued tightening was reported for multifamily as well, but it was down from the previous survey, with 15.9% of respondents reporting tightening standards – less than the 22.2% in Q4 2017. Despite the decline, we can expect to see the effects of previous tightening continue into 2018.

Indeed, a “significant net fraction” of banks said that in 2018 they expected to tighten standards for loans secured by multifamily properties, while a “moderate net fraction” indicated standards would tighten for construction and land development financing.  

The continued tightening comes even as demand for CRE loans remains weak, especially for construction and multifamily, according to the Fed survey. Seventy-one domestic banks responded to the January survey, which tracked changes in the standards and terms on, and demand for, bank loans to businesses and households over Q4 2017.

But foreign lenders painted a somewhat different picture. The survey found that, while a “modest net share” of foreign banks were indeed tightening their standards for CRE loans (with a “significant net fraction” expecting to tighten for construction and land development loans), a “moderate net share” reported that demand for CRE loans was stronger.

At the same time, however, there was little change to the banks’ outlook for delinquencies and charge-off rates for loans secured by multifamily properties in 2018, though they did expect the performance of construction and land-development loans to deteriorate.

To learn about the shift in CMBS lending since the financial crisis, download the CrediFi report here.

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