CRE Delinquencies Trended Down In Q3

Delinquency rates for commercial real estate bank loans continued to decline in the third quarter — but a recent analysis from Trepp suggests performance in the coming quarters may not be as strong as price appreciation slows and recession fears mount.

In an analysis of Trepp’s Anonymized Loan-Level Repository (T-ALLR) data, which is comprised of bank balance sheet loans totaling more than $180 billion across multiple banks, the firm notes that after a slight uptick in CRE mortgage delinquencies in the first quarter, the recovery resumed in Q2 and Q3 with the overall delinquency rate now hovering at 0.70%, near the 0.76% level observed pre-COVID in Q1 2020. In addition, the serious delinquency rate has fallen by four basis points to 0.54%.

Hospitality has the highest delinquency rates but the pace of delinquency did slow in Q3 after increasing in the second quarter. Originations for the sector was around half the pre-COVID pace.

Retail delinquencies have also been improving steadily, though at 1.6% the rate still stands significantly higher than pre-COVID, when it clocked in around 0.5%. Originations in the sector are at about 56% of their pre-pandemic levels as of Q3 2022.

Meanwhile, after rising steadily throughout 2020 and 2021, the office delinquency rate has fallen over the last two quarters. However, the sector “will bear a closer watch in 2023 and beyond, as leases roll in the coming months and loans come up for refinancing,” Trepp analysts note in the report. From a regional perspective, Trepp notes that lender in the mid-Atlantic region have elevated concerns about risk across three of the largest loan types, with risk ratings for office loans increasing substantially for the largest markets “as the long-term prospects for the sector become less certain.”

Office origination value is about 40% lower than pre-pandemic levels as elevated delinquency rates raise alarm among lenders as to the sector’s long-term outlook. The sector is still the largest non-residential source of loan origination among CRE property types, however, accounting for 37% of non-multifamily originations.

The multifamily delinquency rate was 0.3% in Q3, while industrial was incredibly low at 0.04%.

Eric Brody, managing partner, ANAX Real Estate Partners, recently told GlobeSt.com that investment opportunities in commercial real estate will likely abound in Q1 as an unprecedented amount of senior debt matures.

“Newmark recently reported that over $1 trillion in loans are coming due in the next two years, and due to rising interest rates, it is expected that repayment conditions will become more challenging, with bridge financing, office, and retail loans being the most at risk,” Brody said.

“In addition to the rising rates because of increased construction costs, rent growth, and political headwinds, real estate (particularly in NYC) will need an infusion of capital to either refinance assets at a lower rate, pay down existing debt, or complete current projects.”

In addition, Stephen Bittel, CEO of Terranova Corporation, says he expects the lending market to continue to tighten with only banks and life insurance companies lending off their balance sheets.

“Loan sales from existing lenders will accelerate and non- and under-performing loans will need to be moved off balance sheets,” he said. “It will be a tale of two cities with Miami and Austin continuing to outperform the nation, while NYC, Chicago and San Francisco will continue to suffer population and business out flows.”