Time passes and the news about bank CRE loans becomes worse. Credit quality has been dropping and many larger banks have bad operational risk management.
Trepp has released more about criticized bank loan trends in the first quarter of 2024, adding further depth to the discussions. The firm tracks key performance metrics for CRE loans and “standardizes banks’ internal loan risk ratings,” creating ratings of one through nine. If the figure is six or more it shows a heightened risk of fault or loss. That doesn’t mean there will be problems, they’re just more likely to happen.
It’s unlikely to be a surprise that there was a spike in criticized office loans during Q1. New York City currently sits at 44.5%, up from 33.5% last year. One possible reason is the large amount of older office stock that lacks the amenities many office tenants want — a prime example of the bifurcated state of the market.
San Francisco office stock went from 33.5% to 47.7%, hit by tech layoffs and remote work. Washington, D.C. is down from 69% in 2022 to its current 49.1%, showing that things can get better. Things are still bad, but the worst may be behind the city.
But then the conditions in some parts of the South are deteriorating more quickly. Atlanta went from 14% last year to 43.2% now. A big driver has been overbuilding and corporate relocations from the central business district. Miami has seen a 3.3 times year-over-year increase from 9.2% to 30.4%. Houston was a buffer between the two, rising through 2023 but down from 30.4% at the end of last year to 26.1% in Q1.
New York (38.7% in Q1, up from 36.6% in 2023 Q4) and Washington, D.C. (29.9% at the end of 2023, up to 31.9% in 2024 Q1) also lead in retail criticized loan share. These are likely “knock-off effects,” as Trepp says, from office sector weakness, which reduces foot traffic, and changes consumer behavior. Los Angeles, in contrast, is at a 1.9% criticized rate.
Multifamily has seen the highest criticized rates in Atlanta (56.8%, up from 15.6% at the end of 2022) and Houston (up rapidly through 2023 to its current 42.5%). They also have the highest share of multifamily loans on CMBS special server watchlists — 22.4% for Atlanta and 19.7% for Houston. On the other end of the scale, with heavy population growth, Miami is down to 3.6%.
Lodging saw spikes in Miami (up 3.2 times year-over-year to 36.1%), Los Angeles (up 2.5% from last year to 29.8%), and Washington (up 1.5 times year-over-year to 48.5%).