Commercial real estate could be the next hot spot in the shaky US financial sector, according to Bank of America. A warning sign: Spreads for commercial mortgage-backed securities relative to Treasuries are at their widest since May 2020, said investment strategist Michael Hartnett. “CRE is widely viewed as the next shoe to be dropped as lending standards for CRE loans continue to tighten,” Hartnett wrote in his weekly Flow Show report of where market money is headed. The Federal Reserve Senior Loan Office’s latest opinion poll in January found “substantial net shares of banks” reporting tightening of commercial loan lending standards. At the same time, the survey found “weaker demand for loans from companies of all sizes.” While the next SLOOS report will not be released until the beginning of May, the markets expect the trend mentioned in January to accelerate. This comes at a time when the Federal Reserve continues to raise interest rates and tighten conditions. Hartnett said the combination is dangerous as the banking industry faces turmoil. He noted that during the savings and credit crunch of the late 1980s and early 1990s, the Fed didn’t begin cuts until weekly jobless claims rose and nonfarm payrolls fell, meaning the central bank, despite weaker credit conditions maintained a tight policy. “In this recession, add CRE to the coming toxic recession mix,” Hartnett said. His comments come as the Fed reported strong demand for emergency lending programs it launched earlier this month. The Bank Term Funding Program reported $53.7 billion in loans last month, while the discount window was $110.2 billion. The central bank’s balance sheet has grown by more than $390 billion since the introduction of the BTFP and the widening of the discount window.
