Uncertainty in investment performance and diminishing demand for commercial real estate loans has led the Federal Reserve to review and possibly tighten standards on the loans.

U.S. BANKS EXPECT to tighten standards on commercial real estate loans in 2017, according to the Federal Reserve.

Lenders cited uncertainty in investment performance and diminishing demand for CRE loans as reasons for reviewing lending standards.

In contrast to the outlook, domestic banks in the first quarter left current lending standards in place and, in fact, eased lending terms and took other steps to attract borrowers in an environment that has grown more competitive.

But don’t expect that to continue, said the Fed.

The Fed board of governors surveyed 72 domestic banks and 20 U.S. branches and agencies of foreign banks to compile the April 2017 Senior Loan Officer Opinion Survey on Bank Lending Practices

“Banks cited a less favorable or more uncertain outlook for CRE property prices, capitalization rates and vacancy rates or other fundamentals as their most important factors,” said the Fed.

“Participants also cited a reduced tolerance for risk as an important reason for tightening CRE credit policies. On balance, banks reported weaker demand for CRE loans in the first quarter.”

Uncertain and decreasing cap rates was one factor noted by most of the banks, with 27 or 56.3 percent of respondents saying cap rates are “somewhat important” in their policy-making decisions. In that group are 17 large banks and 10 other banks. Nine or 18.8 percent of respondents said uncertainty on cap rates will play a very important role in lending scrutiny.

An uncertain outlook on CRE property prices is another caveat cited by the banks, with 30 or 62.5 percent saying the trend is “somewhat important” to their policy-making decisions and nine or 18.8 percent saying it is “very important.”

Banks generally reported tightening their lending standards on all three major types of CRE loans in the first quarter, said the Fed.  The categories are construction and land development loans; loans secured by nonfarm nonresidential properties; and loans secured by multifamily residential properties

“A significant number of banks indicated their lending standards for construction and land development and for multifamily loans tightened during the first quarter, while a moderate net fraction of banks reported tightening standards for loans secured by nonfarm nonresidential properties,” said the Fed.

A smaller number of banks reported weaker demand for all three major types of CRE loans.