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. In general, standards for all three categories of CRE loans were slightly tighter versus the survey a quarter prior; bank respondents suggested that loan demand was modestly stronger, too.
Chart 1 shows that in aggregate, bank respondents reported a small tightening in lending standards for all types of commercial real estate. A look at the detailed responses by bank size shows that lending standards for smaller banks have generally followed the pattern of their larger brethren (Chart 2), although 10% of smaller banks tightened standards for nonfarm nonresidential loans (such as office buildings) versus the prior quarter.
Chart 1. Commercial Real Estate Credit Standards (All Domestic Banks)
Chart 2. Commercial Real Estate Credit Standards (Small or “Other” US Banks)
Loan demand for all types of commercial real estate has been growing for the past several quarters, as evidenced by Chart 3, which highlights a positive percentage of banks that have seen stronger loan demand each quarter. The percentage of banks seeing stronger demand for construction and land development loans was actually the largest in five quarters, suggesting that developers don’t necessarily view the current environment as the top of the cycle.
Chart 3. Commercial Real Estate Loan Demand (All Domestic Banks)
Chart 4. Loans Secured by Real Estate (FDIC-Insured Commercial Banks and Savings Institutions)
In line with steady increases in demand, banks have been growing their CRE portfolio (Chart 4), with nonfarm nonresidential lending comprising 28% of banks’ aggregate portfolio as of Q2 2015, up by approximately 7-8 percentage points from pre-recession levels. Nonetheless, banks have been paring their real estate lending as a percentage of total lending, as shown in Chart 5. Loans secured by real estate have fallen to roughly half of all net loans and leases—a sharp decline from the 63% observed prior to the last recession—a welcome result from a diversification perspective. For now, access to commercial real estate credit appears to be stable—but the modest tightening over the past quarter bears watching, particularly amid strengthening demand.
Chart 5. Loans Secured by Real Estate as a Percentage of Net Loans and Leases (FDIC-Insured Commercial Banks and Savings Institutions)