If Commercial is Tightening, Will Housing Tighten, too?

NAI-beverly-hanks-look-upWe reported in the Beverly-Hanks Q2 2016 Market Report that commercial sales across WNC are softening considerably. Now, we’re seeing evidence that big banks across the nation are tightening their commercial loan standards. Could these changes be in anticipation of a greater real estate slowdown?

For the fourth quarter in a row, banks are tightening their standards on commercial real estate (CRE) loans. According to the Federal Reserve Board’s July 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices:

In particular, a moderate net fraction of banks reported tightening standards for loans secured by nonfarm nonresidential properties, whereas significant net fractions of banks reported tightening standards for construction and land development loans and loans secured by multifamily residential properties.

 

Domestic banks generally indicated that they had experienced stronger demand for all three types of CRE loans during the second quarter on balance.  A modest net fraction of banks reported stronger demand for loans secured by multifamily residential properties, and moderate net fractions of banks reported stronger demand for construction and land development loans and loans secured by nonfarm nonresidential properties.

In short, banks reported that on all major categories of commercial loans, their standard are now tighter than they have been since 2005.

While banks reported leaving standards basically unchanged for many areas of residential real estate lending in Q2, there is potential for that to change in Q3. Right now, there is still active demand for CRE. But banks often tighten loans of commercial real estate when they anticipate a softening in property investment because of concurrent slowdowns in residential real estate.

Trepp is the leading provider of information, analytics, and technology to the commercial mortgage-backed securities (CMBS), CRE, and banking markets. According to their March 2016 article:

While banks and thrifts, housing-finance agencies, and life insurance companies are still actively writing mortgages, they don’t operate in a vacuum. So they too have increased their lending rates.

 

The result is that the cost of much of the capital that investors use to invest in real estate has climbed, which would result in a drop in the prices they’re willing to pay.

Over the course of Q2, we saw the effects of those changes. And it’s likely these metrics won’t improve much through the election season. For now, we can only tighten our CRE belts and keep a steady eye on residential real estate to see whether these trends continue or begin to level out.

 

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