US lender appetite for risk drops sharply: RELA-Chandan

Lender appetite for risk has dropped sharply, as has optimism with respect to borrower demand, according to a new report from the Real Estate Lenders Association (RELA) and economist Sam Chandan.

Across all property and loan characteristics, the net share of lenders projecting greater risk appetite fell to just 4 percent in the Spring 2015 RELA-Chandan Survey of Commercial Real Estate Lender Sentiment, down from 19 percent in the Fall 2014 report.

Lenders will seek higher debt yields and higher debt service coverage ratios as they seek protection from potential interest rate hikes, Chandan told Real Estate Capital. “As interest rates go up it is harder to service your debt.”

Despite this, loan-to-values are still expected to increase. Chandan said that, as the economy continues to improve and property incomes and values increase further, lenders will continue to fulfill requests for more leverage. “Property value and leverage are highly correlated,” he said.

Respondents were also less optimistic about borrower demand. While nearly half of lenders still see continued improvement in this area, the share expecting a decline increased sharply to 32% for term loans, down from 15% in the Fall 2014 survey. As a result, the net share of respondents projecting an increase in demand for term loans declined to 14 percent, down from 37 percent. Construction loans also saw significant but less severe fluctuations in the same direction.

Among other findings, respondents overwhelmingly expect that new lending activity will peak in 2016 or 2017 after several years of rising volume; the share of lenders expecting to increase lending volume over the next year declined to 42 percent, down from 47 percent; the share expecting further easing in underwriting standards over the next year declined to 23 percent from 29 percent; and lenders were most reserved in their expectations for the hotel sector.

About 70 percent of respondents were domestic bank lenders; 20 percent were foreign bank lenders; 10 percent agency, conduit or another lender type. About 70 percent were national lenders, while 30 percent are focused on a particular region of the US.