Increases in Bank Activity Forecasts Improvement in Sales of Commercial Real Estate (2021)
On the path to economic recovery following the financial tragedies of COVID-19, the banks’ demand for loans are significantly increasing, along with banks easing credit standards in various types of loans. In the “Senior Loan Officer Opinion Survey,” which contains data from bank loan officers about changes to both demand for and supply of different loan types, for the second quarter of 2021, banks seem to have indicated greater loan demand and easing credit standards in almost all types of loans.
The consumer sector produced a significant amount of the improvement, in which stimulus revolved around enhancing household balance sheets led to a surge in auto demand and home mortgage applications. Thus, as household income continues to grow at a sharp pace as it has over the past year, banks are becoming more comfortable in giving out a multitude of loans.
The business and commercial real estate loan backdrop is more varied, although it has remarkably improved since 2020. Demand appears to be limited for small firms and continues to recede for large ones as credit conditions eases sharply for both. Hence, due to the unique personality of the pandemic, performance has been diversified across the sectors.
For the first time since the fourth quarter of 2016, the demand for commercial real estate loans have increased in the second quarter, marking a major turnaround from quarterly readings of negative 34%, negative 62%, negative 37%, and negative 14% in 2020. This data depicts that credit conditions have normalized quicker in this recession as compared to the previous one.
In the graph shown above, the sharp increase in the second quarter suggests that sales will continue to pick up midway through 2021.
The Senior Loan Officer Opinion Survey also illustrates the change in demand and supply within commercial real estate sub-types since 2014. Multifamily demand appears to be rising at the fastest rate, while construction and land development loan demand is also increasing rapidly.
The trend for credit conditions looks similar, as multifamily lending has begun to ease from pandemic conditions while non-farm nonresidential terms remained unchanged and construction and land lending tightened.
The Federal Reserve Board provided additional detail into these trends with following a special set of questions asked in the survey:
“For non-farm nonresidential loans and construction and land development loans, significant net shares of banks lowered loan-to-value (LTV) ratios, and moderate net shared reduced the market areas served. Furthermore, significant and moderate net shares of banks increased debt service coverage ratios on non-farm nonresidential loans and on construction and land development loans, respectively. In addition, moderate net shares of banks lowered the maximum loan size and reduced LTV ratios on construction and land development loans and on multifamily loans, respectively (Federal Reserve Board).”
In short, the Federal Reserve Board depicts that banks are de-risking portfolios through various ways and are seeking better financials in underwriting along with limited exposure to riskier market areas. Banks also appear to be waiting to observe the trends of recovery following the pandemic before further easing conditions, but they are trending toward feeling safer in general. With the next stages of recovery currently taking place with workers returning to their offices and businesses reopening, it is expected that commercial real estate loan demand and supply will continue to improve over the course of 2021.
Original article "Sharp Uptick in Bank Activity Could Signal Better Times for Property Sales" by Christine Cooper and Matt Powers available to read on Costar.
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