Behind the Numbers: The Landscape of Bank-Held CRE Loans

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Episode Transcript:

Today we're diving into a topic that's all about the numbers – bank-held CRE loans. Let's get right into it.

According to the Federal Deposit Insurance Corp.'s 2023 Risk Review, the tally for bank-held CRE loans hit a staggering $3 trillion mark by the close of Quarter 1 2023. A notable fact: all types of CRE loans from banks have shown growth over the four quarters that wrapped up on March 31st.

However, the air isn't all optimistic in the banker's office. There's skepticism about the path ahead. Despite the recent growth, bankers are expressing doubts about the trajectory of lending levels for the rest of this year and into the next.

This skepticism finds validation in an April 2023 survey by the Federal Reserve. Bankers have been vocal about more stringent lending policies and a weaker demand for all types of CRE loans in the past year. These trends aren't expected to reverse; in fact, lending standards are anticipated to tighten further this year, encompassing all loan categories, including CRE.

A notable observation in the report suggests a possible shift in the performance of the CRE market. A modest increase in delinquency rates for commercial mortgage-backed securities raises questions, particularly as the delinquency rate for loans tied to office properties inches upward this year.

The office sector stands under scrutiny. The drop in office demand and sluggish rent growth forecast challenges for borrowers seeking refinancing. The once-reliable longer-term leases that buffered office property owners against reduced occupancy last year are showing signs of wearing thin.

Examining the numbers, community banks are shouldering significant responsibility. They hold 28%, or around $865 billion, of the entire CRE loans within bank balance sheets. A proportion that surpasses their 15% share of total loans – making their influence quite significant.

Digging deeper, some banks shoulder an even greater risk burden. About 30% of banks are marked by an "elevated concentration" of CRE loans, meaning they are exposed to heightened risk. These are banks managing CRE loans exceeding 300% of capital or construction and development loans surpassing 100% of capital.

Shifting the focus to loan categories, existing nonresidential properties command a lion's share, constituting 58% of banks' CRE loan portfolios. Multifamily loans hold their ground as the second-largest real estate loan category, despite a slight decline in Quarter 1 2023 after a robust performance in 2022.

Lastly, let's discuss the high-risk contenders – construction and development loans. These constitute around 16% of the CRE loans in banks' possession. Known historically as the riskiest loan type in real estate, they continue to embrace their reputation.

Looking at CRE asset quality, the FDIC report presents a reasonably strong scenario for the first quarter of 2023. With a past-due loan rate of 0.15%, the overall situation is historically favorable. Notably, even those 1,402 banks with significant involvement in CRE loans maintain historically low levels of past-due loans at 0.19%.

So, there you have it – a sober analysis of bank-held CRE loans. It's a realm where numbers paint a nuanced picture of growth and risk, while the atmosphere remains cautious.

This is Tyler Cauble, Signing off