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 reported to have changed little from the survey a quarter prior, as bank respondents suggested that loan demand was modestly stronger.
Chart 1 shows that in aggregate, bank respondents reported an easing (or lack of tightening) in lending standards for all types of commercial real estate; however, a look at the detailed responses by bank size shows that while large U.S. banks eased credit standards, smaller banks actually have been modestly tightening standards (Chart 2).
Chart 1. Commercial Real Estate Credit Standards (All Domestic Banks)
Chart 2. Commercial Real Estate Credit Standards (Small or “Other” Domestic Banks)
In contrast, loan demand for all types of CRE by both large and small banks 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. Note, however, that the percentage of banks seeing stronger demand for nonfarm non-residential loans (which would include existing office buildings) was actually the smallest in six quarters.
Chart 3. Commercial Real Estate Loan Demand (All Domestic Banks)
Each January, banks are questioned about their view of future delinquencies and charge-offs. As shown in Table 1, while the outlook remains positive, it’s clear that the majority of banks view the bulk of improvement in delinquency rates and charge-offs as having already occurred—an assessment consistent with the fact that the net charge-off rate of real estate loans is back to historical lows (Chart 4).
Table 1. Commercial Real Estate Loan Demand (All Domestic Banks)
Chart 4. All FDIC-Insured Institutions, Select Net Charge-Off Rates
Note that despite a shift toward (riskier) interest-earning assets as a percentage of total assets (Chart 5), real estate lending as a percentage of total lending has failed to rebound to prior levels. Whether banks will begin to increase the proportion of real estate lending dedicated to commercial real estate remains to be seen, especially given the fact that this ratio remains at historical lows (Chart 6).
Chart 5. Interest-Earning Assets as a Percentage of Total Assets, All FDIC-Insured Commercial Banks
Chart 6. Commercial Real Estate and Total Real Estate Loans, as a Percentage of Lending