• Sharp Uptick in Bank Activity Could Signal Better Times for Property Sales

    Sharp Uptick in Bank Activity Could Signal Better Times for Property Sales

    Sharp Uptick in Bank Activity Could Signal Better Times for Property Sales

    As the recovery finds its footing, banks are indicating greater demand for loans and an easing of credit standards in almost all types of loans. Each quarter, the Federal Reserve asks bank loan officers about changes to both demand for and supply of different loan types. The "Senior Loan Officer Opinion Survey" forms one of the best indicators of stabilizing conditions and is typically a reliable leading indicator for gross domestic product growth in general.

    In the survey for the second quarter of 2021, released this month, banks indicated better loan demand and easing credit standards in almost all types of loans.
     

    Most of the improvement came in the consumer sector, where stimulus centered on improving household balance sheets has led to a surge in auto demand as well as home mortgage applications. Household income has grown at a sharp pace over the past year, likely contributing to bank comfort in giving these loans.

    The business and commercial real estate loan backdrop is more mixed, though drastically improved from 2020. Credit conditions eased sharply for both large and small firms, but demand appeared limited for small firms and is still receding for large ones. There is likely quite a bit of noise under the surface for these series, as performance has varied across sectors due to the unique character of the pandemic.

    Demand for commercial real estate loans increased in the second quarter for the first time since the fourth quarter of 2016, marking a striking turnaround from quarterly readings of negative 34%, negative 62%, negative 37%, and negative 14% in 2020. Loan supply tightened again, but at only 2% of banks tightening credit on net. This also marked the best reading in several years. Credit conditions have normalized much quicker in this recession compared to the previous one.
     

    These series have been very reliable indicators of commercial real estate sales activity. The sharp uptick in the second quarter suggests sales will continue to pick up through the middle of 2021.

    This survey also provides detail on how demand and supply has changed within commercial real estate sub-types since 2014. Multifamily demand appears to be rising at the fastest clip, while construction and land development loan demand is also gaining at a rapid pace. Nonresidential property demand, meanwhile, continues to decline, but at a much less rapid rate than in 2020. Nonresidential properties include beleaguered retail and office space in prime metropolitan areas that have seen much less use over the past year and, with uncertainty lingering into 2021, will take longer to normalize.
     

    The trend for credit conditions looks similar. Multifamily lending has begun to ease from pandemic conditions, while nonfarm nonresidential terms were unchanged and construction and land lending tightened somewhat.
     

    With a special set of questions asked in this survey, the Fed provided additional detail into these trends:

    "For nonfarm nonresidential loans and construction and land development loans, significant net shares of banks lowered loan-to-value (LTV) ratios, and moderate net shares reduced the market areas served. Furthermore, significant and moderate net shares of banks increased debt service coverage ratios on nonfarm 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."

    In summary, the Fed noted that banks are de-risking portfolios through a variety of ways, requiring better financials in underwriting as well as limiting exposure to riskier market areas. Banks appear to still be waiting to see how the recovery picks up from here before easing conditions further but are trending toward feeling safer in general. As the next stage of the recovery takes place with even more restaurant reopenings and a return to the office for many workers, expect both commercial real estate loan demand and supply to continue improving over 2021.

    The Week Ahead …

    Plenty of consumer-centric data is set to arrive this week. Consumers have been the backbone of this recovery, not only due to consumption’s high share of GDP but also due to extensive income support programs provided by the fiscal authorities. The consumer confidence index, supplied by the Conference Board, a business research nonprofit, is likely to show households remained optimistic on the recovery in May, although they may begin to show caution as stock indices have declined somewhat recently. Friday’s personal income and spending data should reveal how consumption held up as March stimulus payments rolled off.

    Elsewhere, the second estimate of first-quarter GDP is to be released on Thursday, though this should be largely inconsequential in the context of a rapidly evolving economy. International trade data, to be released Friday, is likely to show continued strength in imports as the U.S. seeks to replenish inventories as global supply chains open back up. April trade data for Japan, Taiwan and China appeared to show just that happening, likely to alleviate the car production slowdown as semiconductors become more readily available once again.