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Commercial real estate could be the next danger spot in the wobbly U.S. financial sector, according to Bank of America. One warning sign: Spreads for commercial mortgage-backed securities are at their widest compared with Treasurys since May 2020, said investment strategist Michael Hartnett. “CRE widely seen as next shoe to drop as lending standards for CRE loans to tighten further,” Hartnett wrote in his weekly “Flow Show” report of where market money is gravitating. The last Federal Reserve Senior Loan Office Opinion Survey , in January, noted “significant net shares of banks” that reported tightening lending standards for commercial loans. At the same time, the survey noted “weaker demand for loans from firms of all sizes.” While the next SLOOS report won’t come until early May, markets are expecting the trend cited in January to accelerate. That comes at a time when the Federal Reserve continues to raise interest rates , making conditions more difficult. Hartnett said the combination is dangerous as the banking industry undergoes tumult . He noted that during the savings and loan crisis in the late 1980s and early 1990s, the Fed didn’t start cutting until weekly jobless claims surged and nonfarm payrolls declined, meaning the central bank could keep policy tight despite weakening credit conditions. “In this recession add CRE to coming toxic recession mix,” Hartnett said. His comments come as the Fed reported strong demand for emergency lending programs it enacted earlier this month. The Bank Term Funding Program reported $53.7 billion in loans over the past month , while the discount window saw $110.2 billion. The central bank’s balance sheet has grown by more than $390 billion since the BTFP was implemented and the discount window expanded.
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