Looking at Risk Retail Loans Might Pose to Banks

Trepp has been reviewing various property types “through the lens of bank CRE loans.” It already covered multifamily and office. Now Emily Yue, a research analyst for the firm, has completed the analysis of retail.

The reason for the bank-centric approach is because about 60% of CRE debt is held on bank balance sheets. As GlobeSt.com has reported over time, banks have faced concerns about the safety of deposits given questionable valuations of assets. That includes the plunging worth of bonds bought at low yields when the Federal Reserve pushed interest rates up or the soundness of CRE loans because of their likely reduced ability to gain refinancing.

To understand the analysis, the following description is important: “As part of the data collection and anonymization process for Trepp’s Anonymized Loan-Level Repository (T-ALLR) data set, Trepp translates contributors’ internal risk ratings to a standardized risk rating that ranges from 1 to 9. A risk score of one indicates the lowest probability of default, a risk rating score that is above six is considered a ‘criticized loan,’ and the highest risk score of nine means that the loan is in default.”

Also, there are only five metros in the analysis: Miami-Fort Lauderdale-West Palm Beach, FL; Los Angeles-Long Beach-Anaheim, CA; Philadelphia-Camden-Wilmington, PA-NJ-DE-MD; Boston-Cambridge-Newton, MA-NH; and New York-Newark-Jersey City, NY-NJ-PA.

Criticized loan shares have moved in odd ways. In the first three analyzed metros, the criticized loan share has dropped from 2021 Q4 to 2023 Q2 in each case. Miami-Fort Lauderdale-West Palm Beach went from between 4% and 5% down to below 1%. Delinquency rate for both periods was zero. The California metro area dropped from about 13% to a bit more than 8%, while the delinquency rate dropped from 5% to about 0%. Philadelphia-Camden-Wilmington had maybe an 18% criticized loan share, now below 15%. But the delinquency rate went from about 4.5% to close to 10%. The Massachusetts metro is where it was previously, about 21% or 22%, but the delinquency rate went from 2% or so down to nearly zero. Finally, the New York metro criticized loan share stayed at close to 28% but the delinquency rate went from just under 2% to 5%.

“However, U.S. retail markets have largely dropped in criticized loan share from Q4 2021 to Q2 2023,” they wrote. “Even the New York metro, which has the highest criticized loan share in the retail sector in Q2, has seen a significant decline from a peak of just over 40.0% at year-end 2020 to less than 30.0% in recent quarters.”