Increasing Risks of CRE Loan Exposure Spreads to Largest U.S. Banks

At a time when an estimated $1.6 trillion in property financing is expected to mature over the next two years, the nation’s biggest banks are “at higher risk of failure because of their commercial property loan exposure.” The Federal Reserve views any ratio over 300% of the banks’ total equity as excessive exposure. In the first quarter, the industry average for commercial real estate loan exposure was 139% according to a study by Florida Atlantic University; however, the analysis further indicated that “67 banks with more than $10 billion in assets have exposure greater than 300% of their total equity based on data reported to regulators.” Due to current increased interest rates, the significantly higher exposure from the big banks is sparking concern; particularly since the eventuality exists that banks are going to be forced by regulators to write down those exposures since commercial properties are selling at serious discounts in the current market. Furthermore, “delinquency rates are rising among certain commercial real estate loans, such as those backed by offices.” Data released by the Federal Deposit Insurance Group indicated that at the end of the first quarter, “the total amount of commercial real estate loans past due or in nonaccrual status stood at $35 billion” — the highest in 11 years, having increased 9% quarter-over-quarter and by 59% year-over-year. The biggest banks reported a past due and nonaccrual rate of 4.48%, which is significantly higher than their pre-pandemic average rate of 0.59%, while banks with assets between $10 billion and $250 billion had a past due nonaccrual rate of 1.47% — up from the pre-pandemic rate of 0.66%. However, despite the increase, the “amount of troubled loans was just 1.23% of all commercial real estate lending,” although “large office loans — over $100 million — had the lowest refinance success rate among commercial real estate loans in 2023, possibly reflecting weak office conditions in big cities — a trend likely to continue in 2024, the Fed said.”