businessperson balancing on lines of a chart like a tightrope walker

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Massachusetts’ banks are caught between conflicting economic signals – growing concern about commercial real estate loans on one side, positive business sentiment and a record-low state unemployment rate on the other – and appear to be reacting conservatively. 

Fed Chair Jerome Powell revealed at a press conference July 26 that the central bank’s staff economists no longer foresee a “mild” recession, as they had predicted in March, and instead expect a “soft landing” where inflation will come down to the Fed’s 2 percent target without causing a deep recession. 

At the same time, a new edition of the Fed’s regular survey of senior bank loan officers noted that the nation’s banks tightened their credit standards in the second quarter. Other surveys say and that half of the country’s bankers are fearful that things will take a turn for the worse in the next 12 months. 

According to Reading Cooperative Bank President and CEO Julieann Thurlow, the incoming chairperson of the American Bankers and Association, bankers are slowly turning towards cautious optimism that the economy won’t fall into a recession.  

I think a lot of us are very cautiously optimistic that [Powell] is going to be able to navigate us to a soft landing. As far as the economy is concerned, and maybe we won’t tip into a recession, there are still people where if you actually go into any airport, they are still filled with people traveling and spending money. The consumer definitely hasn’t put the brakes on, and consumer spending is the largest element of GDP,” Thurlow said. 

Despite the increasing rates and more expensive loans in the market, she said, “the consumer keeps on spending” and this can keep the economy afloat from a potential recession. 

“In the Boston area, house prices are escalating at the rate that wasn’t done before. But even so, people are still buying homes and the values of homes have not slipped. To think that they’re paying these much higher interest rates in the 6 percent range, consumers still have capacity and an appetite,” she added. 

Consumers Still Spending 

Some might be fearful of a potential recession, but several economic indicators suggest businesses and consumers are still standing strong and are looking at expanded profits in the short term, said Rick MacDonald, JPMorgan Chase’s head of commercial bank for New England. 

According to a July JPMorgan survey of business leaders, mid-market business leaders still remain optimistic despite the uncertainties of a rate hike. Believers of a recession dropped to a third compared to 43 percent at the start of the year. 

MacDonald expounded that in the Northeast, companies are divided 50-50 over whether an instance of recession has already passed, and two-thirds of New England-based companies “still feel good about their businesses” moving forward. 

Consumers keep on spending, and businesses take this as a signal to expand more, hire more, and look for more sources of funding, anticipating for growth and better profits despite the uncertainty. This is because consumers still have some pandemic savings to spend and have their jobs and earnings to rely on to support their current lifestyles, MacDonald noted. 

A major point of concern for local banks: loans on commercial real estate properties, many of which are either repricing or coming due in the next several months amid an uncertain office market and changing asset values for multifamily properties. iStock photo

“I think this is somewhat of a COVID snapback. The travel industry has rebounded tremendously, there’s a lot of people travelling. We’re starting to see more of the leisure luxury industry,” he said. “We’re starting to see more normal, pre COVID-19 levels, and just like how it used to be. With unemployment rate at 3.6 percent, people are still finding jobs, and as long as you’re employed, you can maintain your current lifestyle […] and it shouldn’t stop unless someone at some point tells you to stop.” 

“People keep saying that things are bad, but consumers don’t see it,” he added. 

Even when traditional banks tighten lending, businesses will look to smaller banks or non-bank funding sources such as asset management companies and investors, whether through equity or debt fundraising. While these sources for cash are more expensive than a traditional bank loan, some businesses believe that the cost are worth it as the economy still continues to grow. 

“It is not really the rates or how expensive things are that [businesses] are concerned about, it’s about the uncertainty. It will help if [the Fed] gives the figure so that we can plan around it,” MacDonald said. 

Banks Wary of CRE Loans 

But despite the optimistic notes sounded by business and consumer surveys like JPMorgan’s or indicators like the state’s record-low 2.6 percent unemployment rate, banks are still grappling with noteworthy uncertainties in their loan portfolios, and many have responded by tightening credit standards or reducing the volume of new loans they make. 

Commercial real estate loans are seen as risky at the moment, Reading Cooperative’s Thurlow said, especially for office properties or any commercial real estate portfolio in a downtown area where consumer foot traffic has fallen off since the pandemic and some office tenants are shedding space. 

Existing commercial real estate loans that will reprice into the current, higher interest rate environment, are another concern, regardless of whether they are for office properties or another type of asset. 

“One element that the Fed has raised with bankers is whether or not our commercial book of business is going to be able to sustain or withstand a 400-basis-point increase in interest rates when loans come up for repricing,” Thurlow said. “So, could an apartment building shoulder a high [interest] rate increase? Have rents gone up enough so that they can actually withstand that much of an interest rate increase?” 

Executives at the state’s publicly traded banks emphasized their “cautious stance” on their commercial lending in their second-quarter earnings calls, and many said they are “closely monitoring” their portfolios of office loans in cities like Boston as some banks experienced instances of non-performing commercial loans during the quarter. 

Webster Bank reported it divested itself of around $80 million worth of non-medical office loans, reducing its office exposure by 25 percent over the last four quarters, and has carved out a niche catering to the medical office space.  

Berkshire Bank executives said the bank saw lower loan origination volumes in the second quarter and that the bank will be “more selective” in its lending activities given that commercial real estate loans take up 66 percent share of its loan portfolio. Bank executives said they want to focus on their existing New England market share, where they have relationships with borrowers to maintain, to keep risks at bay. 

Eastern Bank executives, for their part, said that they are expecting commercial loan growth to slow in the second half of 2023, but not all the state’s major banks are firmly battening down their hatches. Rockland Trust executives said they are seeing real estate lending opportunities come to them as “competitors are pulling back on their lending.” Executives there said they are being very careful evaluating new loan opportunities, but are still hoping for more favorable economic conditions for the rest of the year. 

Banks Grapple with Dilemma: Recession or Soft Landing?

by Nika Cataldo time to read: 5 min