Today’s post is written by Michael Green, Senior Commercial Loan Originator with Counsel Mortgage Group, LLC. Mike writes monthly on the commercial mortgage market. Check back each month to check his commentary.

The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) regularly checks with banks to better understand their lending landscape. The short take for CRE from the most recent survey is that even tighter underwriting standards can be expected in the future.

And while easing interest rates are eventually expected to support relatively low demand from borrowers, that is unlikely to happen now until late Q2-24. (Q4-23 estimates for Fed Funds to begin lowering was March.)

The Report notes, “Over Q4-23, significant net shares of banks reported tightening standards for all types of CRE loans. Such tightening was more widely reported by the ‘other banks’ category – those with less than $50 billion in assets – than by large banks. Tightening standards particularly by the ‘other banks’ category included multifamily loans. Similarly, significant net shares of foreign banks reported tighter standards and weaker demand for CRE loans over the fourth quarter.”

The net percent of respondents that are tightening standards for CRE loans is a little shy of the 2020 pandemic peak and still near the 2009 apex of the Global Financial Crisis. Also, the net percent of domestic respondents reporting stronger demand for CRE loans is even lower than the depths after the Great Financial Crisis.

The Report goes on, “The most frequently cited reasons for anticipating tighter lending standards over 2024 reported by major net shares of banks included: an expected deterioration in collateral values, an expected less favorable economic outlook, an expected deterioration in credit quality of the bank’s loan portfolio, an expected reduction in risk tolerance, an expected deterioration in the bank’s liquidity position, and increased concerns about funding costs and about the effects of legislative or regulatory changes.” (Makes you wonder how they’ll stay in business, doesn’t it.)

At issue is fear on the part of banks, still around since the closures of Signature Bank, Silicon Valley Bank, and First Republic Bank in the early part of 2023. Roughly a week after shares of New York City Bancorp — which bought most of the assets of Signature, including its CRE loan portfolio — started plummeting. Shares dropped almost 60%.

The problems facing New York Community were more than Signature. A New York co-op loan that wasn’t in default nevertheless went up from sale because of “a unique feature that pre-funded capital expenditures.” There was also an “additional charge-off on an office loan that went non-accrual during the Q3-23 based on an updated valuation.” But they were both related to CRE – what rattles one bank rattles many more.

We offer a few observations about the SLOOS Report:

(1) The report is made by banks to the Fed, a banking regulator. In the current environment, how aggressive would you like your bank to appear?
(2) This Report is public.
(3) The Report is largely based on expectations. What happens if these expectations fail to materialize, or materialize with less severity than anticipated?
(4) If you and I have this information available, it’s safe to say that non-bank lenders, CRE buyers, sellers and brokers have it also. How will market participants gauge their strategies and timing given this information?

All things considered, maybe some counseling is in order … Give us a call to discuss your strategy and timing.