Fed Beige Book: CRE Loans Weaken, New Development Nearly Halts

The Federal Reserve Board released its Beige Book report for February indicating economic activity in the Tenth District was pacing at stable conditions but new commercial real estate development has all but ceased.

While demand for credit remained stable across the district’s banks, demand for CRE loans weakened amid higher interest rates, according to the Fed. Furthermore, appraisers found it more difficult in February to assess property loans due to low property transactions in the past several months. Property buyers didn’t want to be in a position of trying to “catch a falling knife.”

Projects like multifamily housing took a downturn as new private development decreased. The demand for construction labor also continues to be an obstacle for developers. Construction activity for municipal projects combined with projects currently under development is stretching available labor too thin.

Community and regional banking contacts reported overall loan quality for most loan types should remain unchanged over the next six months, however, CRE loans are the exception. Contacts reviewing their CRE portfolios for potential weaknesses and are stress-testing cash flow performance in a higher-rate environment. Despite loan performance being stable for non-criticized CRE deals, bankers predict potential deterioration for these deals in the future.

Business activity across the district grew slightly month-over-month, while profitability declined slightly. Manufacturing firms reported further declines in production but this was partially driven by customers working through excess inventories. The demand for machinery and manufactured products in the long term remains stable.

View the full Federal Reserve Board Beige Book February 2024 report, here.