Loan officers ease CRE standards for the first time this cycle

The Federal Reserve’s July Senior Loan Officer Opinion Survey, released August 3, reads like a credit market exhaling. On C&I, banks reported “basically unchanged standards for commercial and industrial (C&I) loans to firms of all sizes,” with “stronger demand for C&I loans from large and middle-market firms” and little change from small firms.

The turn is in commercial real estate. Banks “generally reported easier standards and basically unchanged demand for commercial real estate (CRE) loans.” Specifically, “moderate and modest net shares of banks reported having eased standards” for nonfarm nonresidential and multifamily loans respectively. After years of one-way tightening, that is the first net easing of the cycle.

What an easing turn means mid-cycle

An easing cycle in CRE arriving in the same week payrolls turned negative is a combination worth sitting with. Competitive pressure to follow looser terms will build just as the labor data argues for discipline. For community banks, CRE concentration is already the exam topic that never leaves the table. If you can show your standards held while the market eased, that counts in your favor at the exam. Quietly matching the street is how concentration findings start.

The first bank to ease sets the market price of risk for everyone. Decide deliberately whether to follow, and write the decision down.