Recent trends in commercial real estate and commercial and industrial loans continued in a status-quo fashion in the second quarter of 2024, according to the latest Senior Loan Officer Opinion Survey results released last week by the Federal Reserve.
Standards for commercial real estate continue to tighten for financial institutions across the country. Meanwhile demand, although climbing slowly to reach a break-even point, is still weak and remains in negative territory.
These conditions are part of an ongoing story. The tightened lending standards stem from an increase in funding costs and the increase in the loan-to-value ratios that we’ve seen across the nation and the diminished amount of debt service coverage ratios that were seen over the past year and a half. Unfortunately, we do expect this trend to continue due to some of the recent pressures in the commercial real estate space.
On the bright side, our banking system has shown true and robust fortitude. Many institutions have worked through their own CRE portfolios and have worked hand in hand with borrowers to modify, extend and re-work existing loans.
Similar to CRE, commercial and industrial lending standards have continued to tighten over the quarter as well, however demand has remained unchanged from the previous quarter. These metrics reflect the same results highlighted in RSM’s Q2 2024 Middle Market Business Index. The planned borrowing survey results show a significant decrease from the previous quarter, which has been aided by companies’ sentiment that there is difficulty in accessing credit.
RSM’s economists do expect a 25-basis-point rate cut to come in the upcoming FOMC meeting this September, and forecast an additional two cuts to materialize before the year is up. These could help middle market sentiment and bolster borrowing appetite for the second half of the year.
