CRE Bank Loan Delinquency Rates Hit Decade-Long High

Concern over commercial real estate loans — particular, though certainly not limited to, the office sector — has been driving increasing degrees of uneasiness among bankers, regulators, and the CRE industry. Some new data is further stoking concerns.

Delinquency rates for CRE bank loans are hitting levels unseen for the last 10 years.

“The volume of past-due loans in which owners of properties rented to others have missed more than one payment jumped 30 per cent, or $4bn, to $17.7bn in the three months to the end of September, according to industry tracker BankRegData,” the Financial Times reported.

“The figure had risen by $10bn in a year.”

This does not indicate an immediate crisis as bank lending “remains in historically good shape and even after the recent jump, just 1.5 per cent of commercial property loans were past due,” the Financial Times noted.

The last time delinquencies hit this level was in 2013 as the country was stumbling toward recovery in the aftermath of the Global Financial Crisis. There is nothing in the current data suggesting that delinquencies cannot or will not rise higher.

The third quarter data didn’t include the impact of the WeWork bankruptcy. The legal move gives WeWork significant ability to cancel leases with little financial penalty to face. The company has already asked to give up 69 leases. It has also been negotiating with more than 400 landlords to improve lease terms.

“WeWork’s Chapter 11 bankruptcy filing pressures an already precariously positioned office sector undergoing structural change,” Moody’s Analytics CRE recently noted. “At the national level, 2023 Q3 vacancy stood at 19.2%, perilously close to the 19.3% record high vacancy rate observed in 1986 and 1991 – Moody’s Analytics CRE forecasts that by the end of this year, office vacancies will once again reach that 19.3%.”

The FT also said that major banks have been holding off placing loans in default or writing off delinquencies. Wells Fargo put a positive spin on the environment in its 2023 Q3 earnings call. Discussing office values and loans and an increase in the office loan reserve from 8.8% to 10.8%, Wells’ CFO Michael Santomassimo said.

“Hopefully, we end up being conservative. But nonetheless, it’s possible that this plays out this way. And so, we haven’t really seen any losses of significant yet — significance yet, but we will. And it just takes some time for it to play out for each of these underlying situations, probably longer than any of us would hope to. You’d hope that you could bring some of this stuff to resolution maybe faster than it really takes in real life.”

From GlobeSt.com reporting and analysis, the reason banks might be holding off from writing down loans is reluctance to recognize losses on their balance sheets. Depositors have shown their willingness since late last fall to pull out money over concerns over potential bank liquidity and solvency problems. With modern electronic financial systems, deposits can be withdrawn at what had been unforeseen speeds, propelling regulatory concerns.