Economic Pressure on Commercial Real Estate Sector
Commercial real estate loans totaled ~$3 trillion across all U.S. commercial banks as of March 2024, which represents a 0.34% increase from February of 2024 and a 3% increase from March of 2023. As seen in the graph below, U.S. banks have continued to expand their CRE loan portfolio over the last ~20 years.
Due to the slowing economy as well as strong preferences for remote and hybridworking schedules, U.S. commercial property prices decreased by 7% in the past year and 21% since their peak in March of 2022, per Green Street’s Commercial Property Price Index. The increasing number of delinquent loans surrounding commercial properties continues to be a concern for banks, increasing from $11.2 billion in 2022 to $24.3 billion in 2023. Additionally, data from MSCI notes that over $38 billion of U.S. office buildings are pressured by potential defaults and foreclosures, which represents the largest amount since the fourth quarter of 2012.
Six of the largest U.S. banks (JPMorgan Chases, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley) have experienced increases in delinquent CRE loans ($9.3 billion in 2023). CRE loans make up ~11% of the average loan portfolio at large U.S. banks, so most large banks have set aside reserves for this sector. Smaller banks, on the other hand, are further exposed as CRE loans account for ~22% of their average loan portfolios.
CRE has long been a hot topic of conversation and CRE regulatory guidance to address elevated concentrations of CRE loans and help institutions manage risk accordingly was released all the way back in 2006. Investors and potential acquirers increasingly focus on CRE concentration levels in assessing valuation and potential riskiness of an institution in today’s environment. For example, an article on S&P Cap IQ noted that investors are increasingly focused on CRE concentrations and those public banks with higher CRE concentrations (those whose CRE loan balances exceeded the 2006 CRE regulatory guidance threshold and had CRE loans above 300% of risk based capital) are experiencing lower returns and pricing multiples relative to their peers in the current environment despite having higher profitability (as measured by ROAA and ROAE and NIMs). ...
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