CRE Loan Delinquencies Growth Is Slowing

It’s a bad news/good news situation.

So much in CRE and economics is a bad news/good news situation. April special servicing figures took their biggest jump in four years. That’s the bad side. The good — commercial real estate loan delinquency growth has decelerated again says S&P Global Market Intelligence.

“Growth in commercial real estate delinquencies slowed for the second consecutive quarter as high interest rates continue to pressure borrowers while banks emphasize that stress remains concentrated in the office sector,” they wrote. “Overdue commercial real estate (CRE) loans across US banks increased 10 basis points sequentially to 1.25% in the first quarter, according to data from S&P Global Market Intelligence. While that represents a new cycle high, the increase was less than the increase of 11 basis points in the fourth quarter of 2023 and the increase of 21 basis points in the third quarter of 2023.”

As S&P Global noted, regulators have been watching banks for their exposure to CRE loans. The concern is that low transaction numbers restrict price discovery. As valuations are depressed, the value of CRE loans also falls below how they’ve been treated on bank balance sheets. Silicon Valley Bank, Signature Bank, and First Republic Bank showed last year what happens when asset prices drop, and depositors get concerned about whether the banks are solvent enough to protect deposits.

“However, many banks have built sizable loss reserves for office, and net charge-off rates declined sequentially across CRE, multifamily, and construction loans,” they wrote. That is solidly good news because it takes the edge off concerns about the underlying fiscal strength of the institutions.

But it probably isn’t enough. Year-over-year CRE loan growth was 3.0% in Q1 of 2024. That was slightly higher than the 2.9% of 2023 Q4, but behind the 12.1% growth in 2022 Q3 and Q4. Given that almost all CRE purchases involve borrowing, then when loan growth is slow, transactions will be as well.

Multifamily, which has been taking hits over the last year, did see increased lending of 4.5% in 2024 Q1, up significantly from 2.1% growth in the fourth quarter of 2023. Like CRE average growth, it was still far below the 17.7% in the third quarter of 2022.

Looking at the number of U.S. banks exceeding 2006 CRE loan concentration guidance, across 2022, 2023, and into the first quarter of 2024, there was an increase up into the first quarter of 2023 and then an arc down again. “Some banks have sought to reduce concentration through loan sales,” they wrote. “Valley National Bancorp shed $151.0 million of CRE loans and $45.6 million of construction loans in the first quarter through participation agreements with Bank Leumi le-Israel BM. In May, WaFd Inc. agreed to sell $3.2 billion of multifamily loans it picked up as part of its February acquisition of Luther Burbank Corp.”

There was a median 1.2% increase in CRE loans over the prior year in the 20 banks with the biggest CRE portfolios. In this case, the median is far off from the mean, as JPMorgan Chase had a 29.3% increase with the acquisition of First Republic Bank and its loans.

“Most of JPMorgan Chase’s portfolio is in multifamily, where it focuses on properties with below average rents in supply-constrained markets, Douglas Petno, co-head of global banking commercial and investment bank, said at an investor day on May 20,” they wrote. “The bank has a credit reserve allowance covering about 8% of its office portfolio.” And Petno said that while charge-offs would be higher year over year, the bank expected them to be manageable and concentrated in office.