The Senior Loan Officer Survey, a quarterly release from the Federal Reserve’s Division of Monetary Affairs, discusses the lending environment based upon responses from domestic banks and U.S. branches and agencies of foreign banks. Among other areas, the survey focuses on commercial real estate (CRE) lending, specifically assessing 1) construction and land development loans, 2) loans secured by nonfarm non-residential structures, and 3) loans secured by multifamily residential properties. Over the last quarter, a modest net fraction of banks eased lending standards on loans secured by CRE. In addition, banks indicated that they had experienced stronger demand for all three types of CRE loans.
Chart 1 shows that bank respondents reported an easing in lending standards for multi-family and nonfarm non-residential commercial real estate, even as standards for construction and land development loans tightened somewhat. Even though lending standards eased over the quarter, many respondents still see standards as tight relative to the range of standards observed over the last decade—particularly among smaller banks. Nearly a quarter of respondents still see “somewhat” or “significantly” tighter lending standards today relative to average conditions observed since 2005 (Tables 1 and 2).
Chart 1. Commercial Real Estate Credit Standards (All Domestic Banks)
Table 1. Current Level of Nonfarm Non-Residential Lending Standards (Relative to Range of Standards from 2005 to 2015) Residential
Table 2. Current Level of Multifamily Lending Standards (Relative to Range of Standards from 2005 to 2015)
As lending standards have eased, demand for all types of CRE loans has increased. Over the last quarter, demand for nonfarm, non-residential loans (such as those for offices) saw the greatest advance (Chart 2).
Chart 2. Commercial Real Estate Loan Demand (All Domestic Banks)
Nonetheless, actual loans outstanding have accelerated much more strongly in the multifamily sector than in the nonfarm non-residential sector (Chart 3), as reflected in the robust increase in multifamily starts—currently at multi-year highs (Chart 4).
Chart 3. Total Amount of Nonfarm Non-Residential and Multifamily Residential Loans Outstanding, $M
Chart 4. Multifamily Housing Starts: 5 or More Privately-Owned Units (000s, SAAR)
Even with the spread differential between short- and long-term U.S. Treasury yields above its 25-year average, bank net interest margins have been collapsing (Chart 5). Additionally, growth in bank loan and lease portfolios has slowed; the compound annual growth rate in net loans and leases for all FDIC-insured institutions was 9.9% between 2002 and 2007, versus just 3.7% between 2009 and 2014. Commercial real estate, not surprisingly, comprises a significant percentage of all real estate lending; construction and land development loans, multifamily housing and nonfarm non-residential properties in aggregate totaled more than 41% of all domestic real estate loan balances at the end of 2014—the highest percentage in six years. Whether or not growth in CRE lending continues or decelerates remains to be seen—particularly in the context of a Fed that is likely to begin increasing target rates this year.
Chart 5. Net Interest Margin and Treasury Spread