Bank-Held CRE Loans Face Headwinds Despite Modest Origination Gains

Trepp has released its analysis of bank CRE loans for the second quarter of 2024. Bank-held commercial real estate origination rates have risen modestly overall from $3.5 billion in Q1 to $3.9 billion. The low increase is likely a combination of higher interest rates and tighter lending standards, “with investors and lenders exercising caution,” according to the software firm.

An increase quarter-over-quarter still means drops from the 2019 pre-pandemic average. The biggest fall was in retail, down 78%. Next was office, off by 65%. Multifamily fell by 61%, industrial by 52%, and lodging by 39%. The overall number was -58%. So, even with quarter-over-quarter improvements, markets face “significant headwinds,” said Trepp.

Office leads in the undesirable category of net charge-offs, even though it was down from about 2.50% in Q1 to 2.25% in the second quarter. Lodging is next, hovering at about 1%. Retail is around 0.5%, multifamily at maybe 0.1%, and industrial at virtually 0%. According to Trepp, lodging is only as high as it is because it has maintained a low loan balance, so with the way the number is calculated, even a small increase in total net charge-offs can cause a bigger increase in the charge-off rate.

Delinquencies are up overall, hitting 2.01% in Q2, increased from 1.83% in Q1. The serious delinquency rates — all loans not current on payments — rose from 1.57% to 1.75%. Retail and multifamily saw slight improvements and other property types saw increased rates. Office rose to 7.2%.

Occupancy rates declined for all property types. Retail had the smallest decrease, going to 89.8%, down from a 2019 rate of 93%. Multifamily similarly fell from 96.3% in 2019 to 91.9%, “as rising interest rates and affordability concerns weigh on both renters and developers,” Trepp wrote. Office had the second steepest decline, from 89.5% in 2019 to 79.9% in the second quarter. Surprisingly, industrial had the largest drop, from 94.3% to 85.2%.

Criticized loans varied by property type and by location. San Francisco regained the dubious honor of having the highest spot with close to 61% of office loans classified as criticized. The second highest market, Washington, D.C., had 53% of office loans considered criticized. New York is at about 48%; Atlanta, 43%; Dallas, about 41%; Chicago at 40%; Los Angeles, just over 30%; Houston and Miami both at about 28%; and Phoenix at under 20%.