Bank CRE Loans: More Delinquency, Bigger Risk, Slowdown in Origins

Given the difficulties the office sector is facing as well as the nervousness underlying the financial sector, it might not surprise that Trepp found in the first quarter of 2023 higher delinquency rates, higher risk concerns, and slowdowns of originations, based on analysis of bank balance sheet loan data.

Total CRE mortgage delinquencies rose by 23 basis points from 0.80% in the last quarter of 2022 to 1.03% in the first quarter of this year. Serious delinquencies were also up by the same factor, from 0.55% in 2022 Q4 to 0.78% last quarter.

According to the Trepp report, the highest delinquency rate was in lodging, or hotel, properties. “The lodging sector has endured high delinquency rates due to the severe impact that the Covid pandemic had on the sector in 2020,” the firm said. “Similarly affected by the pandemic, the retail sector also showed an uptick in 2020, though it was a more modest increase than what the lodging sector suffered.”

Lodging increased from 6.8% in 2022 Q4 to 8.1% in Q1 of this year. Retail went from 2.6% in Q4 to 3.7% in Q1.

Office did see an increase from 2.2% at the end of 2022 to 2.7% in the opening of 2023. That may seem odd as other reports and data have suggested that the property type has been battered in valuations, meaning refinancing would be difficult, at higher interest rates and significantly lower LTV ratios than used to be the case.

But it may also be a question of how office space is usually financed and timing. S&P Global Market Intelligence reported in January 2023 that most top office lender banks had upped their exposure in 2022.  “Of the 17 banks that disclosed outstanding office exposure of at least $400 million as of the end of the year, all but four reported larger office lending books than at the end of 2021, according to S&P Global Market Intelligence data,” the company said. “Yet on a quarter-over-quarter basis, nine of the banks trimmed their outstanding loans in the sector as of Dec. 31, 2022.” If the loans were that recent, it may be not enough time has passed for problems to bubble up.

Multifamily and industrial saw the lowest delinquency rates, with the former moving from 0.6% in Q4 to 1.0% in Q1, and the latter being the only property type not seeing an increase, staying as it did at 0.3%.

Western and southern regions saw “significant increases” in multifamily and office risk outlooks. Banks in the middle Atlantic region saw some of the biggest risk concerns with office (31.6%), retail (22.9%), and lodging (59.1%). In New England, lodging (31.0%) and office (21.4%) showed the highest risk. Lodging in west south central has the biggest concerns with lodging (35.6%).

As for CRE loan originations, they fell “significantly” in Q1, which correlates with what bankers told the Fed recently, except they said that demand was off, and a bank can’t originate a loan if someone isn’t applying.