High-Volatility CRE Loans Take a High-Speed Crash in Q1
And some banks that didn’t take a bootleg turn in their loan vehicles may find themselves posting impairments.
More discouraging news for commercial real estate coming from S&P Global Market Intelligence. As for banks, what might seem bad may be good.
The organization undertook an analysis of high-volatility commercial real estate (HVCRE) loans. In Q1 2023, the “US banking industry’s exposure to high-volatility commercial real estate (HVCRE) loans declined 21.8% sequentially in the first quarter to its lowest level in years.”
“The aggregate HVCRE loan balance for US banks stood at $32.37 billion in the first quarter, down from $41.39 billion in the fourth quarter of 2022, and $34.29 billion in the prior-year period,” the firm wrote, based on its data. “This marks the lowest balance of such loans since the first quarter of 2019. Total risk-weighted HVCRE loans as a percentage of total risk-weighted assets was 0.22% at the end of the first quarter, down from 0.28% in the 2022 fourth quarter and 0.24% a year earlier.”
The fall is important and bad news for CRE because of what the lending represents. Such loans “primarily finance or refinance acquisitions, developments or constructions of real properties and are used to provide financing to acquire, develop or improve properties into income-producing ones that are dependent on future income, sales or refinancing of such real properties for repayments.”
That doesn’t include one- to four-family residential properties, community development projects, existing income-producing properties with permanent financing, and some other types of CRE projects. Even so, the HVCRE loans are at the heart of making much of the CRE industry possible, particularly growth.
The importance of the type of loans puts their drop into perspective, given a number of factors, including lack of price discovery which is making deals harder to value and compare and higher interest rates that make many projects impossible to structure and complete.
Goldman Sachs remained its top position among top 20 bank HVCRE loan balances in Q1. Of the group, 13 did see increases in quarter-over-quarter loan balances and seven saw declines.
But that isn’t enough to build optimism in the near future of the industry. In an interview with CNBC, Goldman Sachs CEO David Solomon said that in the second quarter, the bank would post impairments on CRE loans and investments. “There’s no question that the real estate market, and in particular commercial real estate, has come under pressure,” Solomon said. And he noted that Goldman had taken direct investments in some CRE projects that will also face markdowns in value.
Expect the second quarter to be potentially more telling.