Too Many California Banks Overexposed to CRE

There’s been some sobering news on the economic front this week. Inflation is rising again, which means interest rates probably won’t be dropping anytime soon. Larry Summers is warning that rates may actually increase in 2024.

That cracking sound you’re hearing is the snapping of pencils that were counting on rate cuts later this year to restore some semblance of order to CRE balance sheets that have been upended by the rising cost of debt, shrinking margins and plunging property values.

The only ingredient missing from this bubbling stew of uncertainty is another banking crisis. We hate to tell you this, but conditions may be ripe for another fiscal debacle—in the same place where last year’s regional bank scare unfolded.

A new analysis from Bloomberg, based on federal call reports that lenders were required to file at the end of last year, reveals that almost of third of the registered banks in California are carrying commercial real estate debt that is 300% or more than their capital.

California, home of Silicon Valley Bank (SVB)—the epicenter of the regional bank crisis—tops the list of states with banks that are overexposed to CRE loans that encompass three times more than their capital, with 31% of its 127 registered banks in that category.

New Jersey is a close second, with 30%; rounding out the top five are Rhode Island (29%), Washington (26%) and Oregon (25%).

Nine of the top 10 states on the list of overexposed banks have 20% or more of their registered banks in the 300% or higher red zone, including New York (24%), Maryland (23%), Arizona (20%) and Alaska (20%), according to call reports filed as of March.

Last week, Michael Barr, the Fed’s vice chair for supervision, compared the stress in the financial sector to a “slow-moving train.” Barr said the central bank is keeping an eye on lenders with exposure to the office sector where property values are doing a cliff dive.

Federal regulators are closely monitoring banks that are overexposed by 300% and have grown their CRE loan portfolios by at least 50% in the past three years. According to Bloomberg’s analysis, 20 California banks have exceeded both thresholds for concentrated risk.

More than $1T in CMBS loans backed by CRE is coming due in the next 12 months, most of them debt packages that would have to be refinanced at much higher rates at a time when lenders have pulled back from the market.

Foreclosure filings on commercial real estate property in California in January 2024 were triple the number of foreclosures in January 2023, according to Attom data.

After the collapse of SVB and First Republic, California’s Department of Financial Protection and Innovation said it would boost oversight of large banks in the state. However, the vast majority of California’s banks are relatively small and may have flown under the radar of regulators, the report said.