Commercial Property Lending (Jan.)

Commercial property borrowing beginning to show signs of life

• Commercial real estate debt growth picked up in January, seeing its strongest rise since April. That likely reflects a sharp increase in investment deals completed at the tail-end of 2020. While this could support continued debt growth in the coming months, we don’t think a rapid acceleration is likely just yet.
• Outstanding real estate debt held by commercial banks grew by $4.9bn in January to $4.67trn. This marked a turnaround compared to the previous four months, in all of which outstanding debt had fallen.
• That growth in outstanding debt was driven by increased lending against commercial real estate. In fact, at $7.4bn, commercial property debt (excluding-farmland) saw its strongest monthly growth since August. And that figure reflected increases for both multifamily properties and the other commercial sectors. (See Table 1.) Elsewhere, outstanding debt secured against residential assets fell for the sixth consecutive month.
• The growth in lending against commercial assets is likely to reflect a stronger-than-expected level of transactions in Q4, with December recording a sharp rise in deal volumes. That suggests that renewed lockdowns didn’t dent investment activity as much as we had expected. What’s more, the Fed’s Q4 2020 Senior Loan Officer Survey showed that, although lenders are still generally tightening standards, a lower balance was doing so in Q4 than in Q2 and Q3. (See Chart 1.) And the demand balances showed improvement too.
• The strong growth in commercial real estate debt recorded in January surprised us. There could be further upside in the next couple of months if investment activity continues to build in Q1. But we don’t expect a rapid acceleration in outstanding debt given a still uncertain outlook.

Chart 1: Balance of Lenders Tightening Lending Standards (%, Net Balance)

Source: Federal Reserve

Table 1: Federal Reserve Real Estate Loans by Commercial Banks
Seasonally adjusted	2020												2021
($bn unless otherwise stated)	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Jan
Total stock of loans outstanding	4631	4643	4664	4681	4675	4673	4688	4689	4687	4686	4673	4663	4668
– of which comm. property (excl. farms)	1880	1889	1900	1912	1916	1916	1921	1927	1931	1934	1939	1940	1946
of which multifamily	401	404	408	410	412	413	415	417	418	419	421	419	421
Multifamily as share of commercial (%)	21.3	21.4	21.5	21.5	21.5	21.6	21.6	21.6	21.7	21.7	21.7	21.6	21.6
Net lending	12.9	12.3	20.6	17.6	-6.7	-2.2	15.7	1.0	-1.9	-1.2	-13.6	-9.7	4.9
– to commercial property (excl. farms)	11.0	9.1	10.1	12.7	3.5	-0.2	5.0	6.2	4.1	3.2	5.3	1.1	7.4
– to multifamily	3.7	3.3	3.4	2.7	2.0	1.1	1.1	2.0	1.6	1.0	1.8	-1.5	1.5
Source: Refinitiv

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Kiran Raichura, Senior Property Economist, kiran.raichura@capitaleconomics.com