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Demand for CRE Credit is On the Rise

12/16/2014

When it comes to credit demand for commercial real estate, there has been a noted increase. In September of this year, loans climbed 20.26 percent, which is a strong indicator that banks are once again lending money, as reported by CBS News.

Easing in current credit conditions

In 2008, the real estate market had a total meltdown, causing lending standards to be seriously tightened by banks. As a result, loans for residential, as well as commercial real estate, were hard to come by. However, in looking at the recent Consumer Credit Report and Senior Loan Officer Survey conducted by the Federal Reserve Bank, easing in current credit conditions is significant.

This report also showed that over the past three months there was stronger demand, but also easier lending policies in place specific to commercial and industrial loans, as well as commercial real estate loans.

Loans are being approved

In other real estate news, loans are being approved by big banks, those with a minimum of $10 billion in assets, at a record pace for small businesses. In fact, the approval rate for these banks in April jumped to 19.4 percent, hitting a record high for the Biz2Credit Small Business Lending Index.

As for the reason (or reasons) that big banks are now lending money again with regards to commercial properties, people have differing opinions. When loan standards were much tighter, fewer loans were being given by banks due to less demand, something that has been reported ever since the Great Recession ended. However, there is now stronger demand for industrial and commercial loans, as well as loans for credit cards and automobiles.

Gaining ground after the last financial crisis, the US economy is moving forward, although many people feel frustrated that the progress is slow and unbalanced. Even so, there is steady improvement specific to commercial real estate and at this point, trends look strong. Of course, there is also risk, but if the economy keeps picking up the pace, fundamentals will continue to improve.

One thing looming is whether the Federal Reserve will increase interest rates in 2015, but also when the hike will occur. The general consensus among experts is that by the second quarter of next year rates will begin to climb. The biggest concern is that if it takes too long to increase rates, at least for some sectors, extremely cheap capital could lead to instability in asset price.

Helping the value of real estate the most over the past 15 to 20 years is the consistent decline in long-term real rates. Some believe these will begin to falter, which in turn will put pressure on the price of real estate. Then there is another group that feels strongly that commercial real estate lending has not been affected by interest rates for the most part. Even if rates go up somewhat, the supply of credit for commercial real estate will not be majorly impacted.

Today, lenders are not only offering loans but staying competitive. To reduce exposure to risk, most loans are short-term. In addition, there could be a drop in vacancy rate along with improvement in rents that will bolster construction if the lending pace picks up. Because of this, more lending will be required.

Bottom line

The bottom line, commercial real estate is being viewed globally as a safe-haven. Even during the 2008 to 2009 financial crisis, many sectors held up well so it is expected that there will be more demand from sovereign wealth funds. This means that from a global perspective, commercial real estate is attractive.

 

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