Tighter Credit Market Reported for National Commercial Real Estate Industry
The Federal Reserve recently completed its “2008 Senior Loan Officer Opinion Survey on Bank Lending Practices.” It is a much-awaited quarterly survey of the opinion of banking executives that specialize in lending for the real estate market.
While the results were expected to suggest a tightening of loan requirements throughout the industry, the results for commercial real estate were particularly stark. “About 80 percent of domestic banks,” according to the survey, “reported tightening their lending standards on commercial real estate loans over the past three months.”
Roughly about forty percent of foreign banks and fifty-five percent of domestic banks reported requiring higher debt service coverage ratios and lower loan to value ratios than in the previous quarter. As the national value of commercial real estate – according to at least one major study – has fallen in the past two quarters, these more demanding requirements were seen by the Fed as a particularly worrisome sign. The two trends together may put a serious damper on activity in the national commercial real estate market throughout much of 2008.
The majority of banks that reported tightening their loan standards sighted the worsening national macroeconomic outlook as a major reason for their changes in lending standards.
The bank's tepidity is reinforcing: Many banks also blamed the reduced liquidity of collateralized securities in the commercial real estate market as another primary reason for their caution.
While much of this newfound caution on the part of banks has to do with the liquidity squeeze in credit markets overall, the Fed's findings suggest that more than reduced liquidity has spilled over from the residential market to the commercial market: The attitudes of executives dealing with both commercial real estate and residential real estate loans have shifted significantly as some of the world's largest banks are struggling to respond to the subprime crisis.
It is important to note, however, that this international survey says little about the local attitudes of smaller banks. While executives at the larger banks seemed generally rattled by the recent fate of Citibank and Washington Mutual, attitudes among executives at the smaller banks were very much correlated to the fortunes of their own niche markets over the past several months.
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