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Will eased terms on CRE loans cause a refi spike?

U.S. banks loosened lending standards for commercial real estate loans in the first quarter of 2018, a move which is likely to make them more competitive in structured finance transactions.

June 19, 2018
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U.S. banks loosened lending standards for commercial real estate loans in the first quarter of 2018, a move which is likely to make them more competitive in structured finance transactions.

Banks eased terms across all three categories of CRE loans: construction and land development; multifamily; and non-farm non-residential loans, according to the Federal Reserve Board’s survey of senior loan officers.

The easing of these regulations is “overdue,” says Aaron Appel, Head of JLL Capital Markets, Finance in New York, and will help better position banks in a competitive market.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act placed regulatory constraints on banks, restricting their lending. This made it harder for banks to compete with non-traditional lenders, such as mortgage REITs and debt loan providers, who were more able to take risks.

Alternative lending, as a result, has been on the rise – but the recent changes to banks’ lending standards will help banks push back against that trend, Appel says.

The eased standards could also cause a modest bump in transaction volume over the next quarter or two, says Ryan Severino, chief economist for JLL .

Given the late stage in the cycle, the changes are unlikely to cause a major spike in activity, says Severino, but they “could really move the needle on the refinancing of existing loans.”

“When lenders are less stringent and more aggressive with what they’re offering, it increases the probability that an existing borrower will refinance,” he says.

And although some Fed officials worry about the possibility of an asset bubble in the commercial real estate sector, Severino says the overall fundamentals of the market remain strong.

“Banks can’t continue to loosen regulations indefinitely without it becoming problematic — but we’re still some way from that,” he says. “To me, a ‘bubble’ means that the market values are completely misaligned with the underlying fundamentals of the asset class. There’s still robust demand for high-quality properties. Are they expensive? Absolutely. Is it a bubble? This doesn’t feel like a bubble to me.”

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