CRE Bank Loans: Weaker Demand, Tighter Standards

Feeling the market get shaken while some big money gets ready for distressed property fire sales? Wondering how a refi can possibly work when interest rates are multiple percentage points higher than they were months ago and leverage has come stumbling back to earth?

Sometimes data from the near past finally catches up to reality of the all too present. That’s the sense coming from the Federal Reserve’s October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices. Bank loan demand was down over the immediate three months for firms of all size and for all CRE categories, while bank lending standards have gotten tighter.

This stands in sharp contrast to residential real estate, credit card loans, home equity lines of credit.

“Over the third quarter, a major net share of banks reported having tightened standards for construction and land development loans as well as for nonfarm nonresidential loans, while a significant net share of banks reported having tightened standards for loans secured by multifamily properties,” said the report. “Meanwhile, significant net shares of banks reported weaker demand for all CRE loan categories. Furthermore, significant net shares of foreign banks reported tighter standards for CRE loans, on net, while major net shares of foreign banks reported weaker demand for such loans.”

Could things get tighter on the CRE loan front? Absolutely. On the question of whether there is a recession in the economy’s near future, the answer is almost resigned.

“Most banks assigned probabilities between 40 and 80 percent to the likelihood of a recession in the next 12 months, with no bank reporting a probability less than 20 percent,” the report noted. “Although banks in general assigned relatively high probabilities to a recession occurring in the next 12 months, most banks reported expecting the recession to be mild to moderate, should one occur. In addition, most foreign banks assigned a probability between 40 and 80 percent that a recession would occur in the next 12 months.”

Should there be a recession, the lending officers largely agreed that things for borrowers would get tighter. “Most banks assigned probabilities between 40 and 80 percent to the likelihood of a recession in the next 12 months, with no bank reporting a probability less than 20 percent. Although banks in general assigned relatively high probabilities to a recession occurring in the next 12 months, most banks reported expecting the recession to be mild to moderate, should one occur. In addition, most foreign banks assigned a probability between 40 and 80 percent that a recession would occur in the next 12 months.”

The loan officers also agreed that the tightening of standards wouldn’t be done in such a case, and they would get even tighter.