Total CRE Loans From Banks Hit $3T Even as Originations Cool

New reports from the Federal Deposit Insurance Corporation and Mortgage Bankers Association show a somewhat puzzling state of commercial real estate: more than $3 trillion in outstanding loans but commercial and multifamily loan originations down 53% year-over-year in Q2, although up 23% from Q1.

First, the FDIC’s 2023 Risk Review. At the end of 2023 Q1, bank-held CRE loans had exceeded $3 trillion in value. Community banks had 28%, or $865 billion, of the CRE loans on bank balance sheets, “a share that remains outsized compared to their holdings of 15% of total loans.”

The FDIC found that “elevated concentrations in CRE lending” persisted among banks, even with falling valuations and concerns about various types of properties, office especially. The agency wrote, “All FDIC Regions saw a rise in the median CRE loan concentration level compared to a year earlier; exposure remained the heaviest in banks headquartered in the West and the Northeast.”

It also said that four of the five major CRE property types had sound fundamentals coming out of 2022. The remaining one, office, “faced increasing risks through first quarter 2023.”

Industrial saw continued strong demand for warehousing and distribution, with the sector remaining at the end of 2022 “near an all-time low” in vacancy rate. However, going into 2023 amid a weakening of economic conditions, some industrial markets became saturated.

Multifamily property benefited, as it has, from a tight single-family housing market. “Relatively low single-family home affordability kept many would-be first-time homebuyers in the rental pool,” they wrote. “Still, elevated rent levels discouraged some potential renters, and rent growth slowed in late 2022 and into first quarter 2023.”

Retail continued strongly “well into 2023” on the winds of ongoing consumer spending. Lodging saw a recovery because of pent-up consumer demand.

However, by the first quarter of 2023, “98 percent of banks held CRE loans and CRE was the largest loan category for almost half of all banks.” CRE loans held have increased every quarter since the opening of 2013. They comprise a quarter of all loans held by banks and at the end of 2022 were 13% of total banking assets.

But things seem to be cooling, according to the MBA. “Commercial and multifamily mortgage loan originations were 53 percent lower in the second quarter of 2023 compared to a year ago, and increased 23 percent from the first quarter of 2023,” the organization’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations said.

Originations for all major property types decreased. “There was a 74 percent year-over-year decrease in the dollar volume of loans for health care properties, a 66 percent decrease for office properties, a 55 percent decrease for retail properties, a 55 percent decrease for industrial properties, a 48 percent decrease for multifamily loans, and a 32 percent decrease for hotel properties,” the report said.

Loan dollar volumes decreased by 69% overall, year over year. “There was a 60 percent decrease for investor-driven lenders, a 49 percent decrease in life insurance company loans, a 23 percent decrease for commercial mortgage-backed securities (CMBS), and a 11 percent decrease in the dollar volume of government sponsored enterprises (GSEs – Fannie Mae and Freddie Mac) loans,” they wrote.

The good news was a 23% increase in originations from Q1. “There was a 37 percent increase in originations for multifamily properties, a 19 percent increase for industrial properties, and a 16 percent increase for office properties,” the report said. “Originations for retail decreased 13 percent and originations for hotel properties decreased 27 percent.”