Banks Reduce CRE Exposure, Tighten Credit, Demand Remains Flat

From CoStar:

Continued Weakening in Real Estate Markets Increasing Risk, Cutting Demand

As firms continue to downsize, cut costs and reduce inventories, the nation's largest banks are reporting that demand for credit in the commercial real estate market is well below normal levels, according to the U.S. Treasury Department's monthly bank lending survey from the largest 21 recipients of government bailout money through the Capital Purchase Program.

The May survey results released this week found that new loan demand in commercial real estate remains low due to the lack of new construction activity. In addition, developers are reluctant to begin new projects or purchase existing projects under the current deteriorating economic conditions, which include a rising supply of office space as firms downsize and vacancies rise.

Nearly all respondents indicated that they were actively reducing their exposure to commercial real estate loans, as they expect CRE loan delinquencies to increase over the coming year. The outstanding balance of CRE loans of all respondents decreased by 1%, and the median change in outstanding balances was flat.

At the same time, for the month of May, total renewals of existing accounts and total new commitments in commercial real estate increased from April. The changes in renewals and new commitments on the institution level, however, were mixed; 10 of the 17 institutions active in the CRE renewals reported increases in renewals, while seven reported decreases. Nine of the 16 institutions actively making new commitments in the market reported increases in new commitments, while seven reported decreases in new commitments. The median change in renewals of existing accounts was an increase of 2%, and the median change in new commitments was an increase of 11%.

This is an interesting interpretation of the data. With large maturities looming, it seems unlikely there is less 'demand' for credit. It's really that there is less extension of credit due to tightening lending standards.