How Criticized Banks Loans Stack Up By Property Type

Banks are historically the single most critical aspect of commercial real estate lending because they are the largest portion. Being private, though, the data is largely unavailable for examination. It’s why a category like CMBS gains attention beyond its natural importance because there is a greater amount of public data.

However, there are some views into commercial banks. Trepp just released an analysis of bank criticized CRE loans. The database is “a consortium of CRE loan data from participating US banks … where we also track CRE loan performance metrics by geography and property type.”

The data includes criticized loans for which a bank has heightened concerns, although the loans may not be delinquent. “Trepp takes banks’ internal risk ratings for their loans and standardizes them to a scale of 1–9, ranked by increasing risk for loan loss and default, and loans with a risk rating of 6 or higher are classified as criticized loans.”

The analysis is presented from eight different metro areas — Atlanta-Sandy Springs-Roswell, GA; Houston-The Woodlands-Sugar Land, TX; Miami-Fort Lauderdale-West Palm Beach, FL; New York-Newark-Jersey City, NY-NJ-PA; San Diego-Carlsbad, CA; San Francisco-Oakland-Hayward, CA; Seattle-Tacoma-Bellevue, WA; and Washington-Arlington-Alexandria, DC-VA-MD-WV. It seems unlikely that all the banks in each of these areas are necessarily included, and probably not truly representative. But sometimes incomplete data is better than none. Also, there is information separately for office, multifamily, retail, industrial, and lodging.

“Since a bank’s risk rating on a loan reflects the lender’s expectations for ultimate repayment, these risk ratings can go beyond loan performance and typically reflect an outlook on the borrower or the property type sector,” they wrote.

Office faces the largest share of criticized loans. San Francisco had the highest criticized office loan share of any major metro since the start of the pandemic. But Washington D.C. criticized office loan share jumped, reaching 72% in Q3 2023, while San Francisco had 59.4%. In third place was Seattle, with 49.2%, and then New York’s 43%.

But in 2023 Q4, the most recent data, all four saw declines in the percentages of criticized loans. At the same time, the others increased. San Diego went from 15.0% to 41.6%. and Houston rose from 21.3% to 36.8%.

In multifamily, “Atlanta MSA’s criticized multifamily loan share has climbed about 36 basis points to 51.5% in Q4 2023 from 15.6% in Q4 2022,” they wrote. “Other Sunbelt multifamily markets have also seen sizable increases in criticized loan rates. The New York City region previously had the highest criticized loan share for multifamily loans, but now the rate sits right below the four Sunbelt multifamily markets that have surpassed New York for the highest criticized multifamily loan share.”

In retail, New York and Washington, D.C. respectively saw the highest criticized loan rates reach 36.7% and 32.8%. Dallas went to 14.4% and Miami and Houston rose slightly to 7.0% and 2.3%. “On average, however, the retail sector in the U.S. is seeing lower criticized loan rates relative to other property types,” they wrote. “The retail sector is also seeing signs of recovery and resilience post-pandemic; although there is some rightsizing happening right now in the retail space, especially amidst various retailer bankruptcies, the overall outlook remains optimistic.”

Industrial has been far below 10% for the most part except for Chicago, where the criticized loan percentage has jumped to about 35%. “During the pandemic, higher industrial demand and low interest rates led to increased leasing activity as well as new industrial supply across Chicago,” Trepp said. “However, as rates began to rise, both increased labor and borrowing costs have slowed down activity in the Chicago industrial market.”

Finally, results for lodging are running from 0% at Dallas-Fort Worth — down from 94.4% in 2022 Q1 — to nearly 40% in Atlanta. “Economic factors such as inflation have posed risks to the lodging sector, affecting both consumer spending and corporate travel budgets, Trepp said. “Furthermore, the increase in operational costs, including labor, utilities, and maintenance, is a challenge for hotel operators. The continuation of lower criticized loan rates in the lodging sector will be dependent on the expense side of the equation as well.”