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Bank-held CRE loans totaled more than $3T at the end of Q1 2023, according to the Federal Deposit Insurance Corp.'s 2023 Risk Review, released Tuesday. All types of CRE loans by banks grew in the four quarters ending March 31, the report said.
However, bankers expressed skepticism over continued growth in lending levels for the remainder of the year and into 2024.
The report cites an April 2023 survey by the Federal Reserve that found bankers reported tighter lending policies and saw weaker demand for all types of CRE loans over the past year, and that they expect to keep tightening lending standards this year for all loan categories, including CRE.
“A modest rise in delinquency rates of commercial mortgage-backed securities may signal a shift in CRE market performance,” the report states, especially as the delinquency rate on loans associated with office properties rises this year.
The office sector is particularly vulnerable, the agency reports. The decline in office demand and weak rent growth will mean some borrowers will have difficulty refinancing, and the longer-term leases, which helped to insulate office property owners from reduced occupancy in 2022, aren't going to last forever.
Community banks hold 28%, or $865B, of the CRE loans on bank balance sheets, a share that is outsized compared to their holdings of 15% of total loans, the agency reports.
Some banks have a larger share of CRE loans, and thus a larger share of the risk associated with them. Some 30% of banks have an “elevated concentration of CRE loans defined as exceeding 300% of capital [tier 1 capital and credit loss reserves for loans and leases] or construction and development [C&D] loans exceeding 100% of capital,” the report notes.
Loans for existing nonresidential properties made up the largest share of banks' CRE loan portfolio, at 58% of the total. Multifamily loans remained the second-largest real estate loan category, despite a slight decline in the first quarter of 2023 after increasing in 2022, according to the FDIC.
About 16% of the CRE loans held by banks are construction and development loans, which are historically the highest-risk loan type associated with real estate.
The agency reports that CRE asset quality remains reasonably strong, at least as of the first quarter of this year, with a past-due loan rate of 0.15%, which is still historically low. Even the 1,402 banks with high concentrations of CRE loans experienced historically low levels of past-due loans, at 0.19%.
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