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ay 13, 2025 | 1.5 min read
The Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices for 1Q 2025 shows that commercial real estate (CRE) lending standards remained largely unchanged despite banks tightening standards for corporate and consumer loans. Large banks loosened standards while small banks tightened.
A greater percentage of large banks reported originating loans at the same or tighter spreads, higher Loan-to-Values (LTVs), and lower Debt Service Coverage Ratio (DSCR) compared to last year. This is a positive development according to our analysis.
The CBRE Lending Momentum index surged in 1Q24, exceeding its pre-pandemic average. The Commercial Real Estate Finance Council Sentiment Index declined but is now in-line with year-over-year changes in CRE valuations of ~5%. We believe this reinforces our view that real estate is a relative winner in the current market environment.
CRE total returns can "muddle along" in 2025 as income returns mitigate potential headwinds to capital returns. History shows that 7% to 8% annual returns over the longer term are reasonable.
A nearly unchanged percentage of banks (7.9% vs 6.9% previously) reported tighter CRE lending standards in 1Q25. Loan demand continued to improve, reaching -3.2% vs -4.8% previously. This represents the 8th consecutive quarter of sequential improvement.
Lending standards tightened for construction & land development (11.1% vs 9.5% previously) and core commercial (10.9% vs 8.1% previously), while multifamily loans were less tight (1.6% vs 3.2% previously). Large banks eased standards for multifamily and construction & land development loans, while small banks tightened standards for all CRE loan categories.
Loan demand for construction & land development was unchanged at -6.3%, while demand improved for core commercial (-1.6% vs -3.2% previously) and multifamily loans (-1.6% vs -4.8% previously). A significant or moderate net share of large banks reported stronger demand, while moderate net shares of other banks reported weaker demand for all CRE loan categories.
Investing in real estate involves risks including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. Commercial real estate lending involves several risks, including market volatility, credit risk, operational challenges, and legal/regulatory compliance.
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