Overview of Resilient Commercial Real Estate Loan Portfolios
The commercial real estate (CRE) loan portfolios of US regional banks have proven to be widely resilient despite concerns arising from a handful of deteriorating loans, according to analysts. However, the office sector remains a critical concern.
Key Findings from Q3 Earnings Reports
- At least eight mid-sized and regional US banks reported lower non-performing loans (NPL) in their commercial real estate credit portfolios compared to the previous year, as analyzed by Reuters from Q3 earnings reports.
- Commercial real estate, primarily office loans, has been under pressure since the Covid-19 pandemic altered work habits. Office demand has yet to see a significant rebound despite return-to-office mandates.
- Nearly a dozen lenders have reduced their office loan concentration.
- Flagstar Bank (formerly New York Community Bank) decreased its loss provisions for CRE-related office loans by 1.42 basis points in Q3.
- Regions Financial reported that office loans drove their Q3 loan forgiveness, though they expect to resolve these exposures soon.
- M&T Bank plans to further trim its office loan portfolio, while Citizens Financial noted a modest decrease in their office balances during Q3.
Office Loan Performance and Challenges
Delinquency rates for office property loans have reached record highs, with over 11.76% currently delinquent, according to Trepp data.
“There’s a fundamental shift in how people work. Office vacancy rates are higher than even after the global financial crisis. We haven’t solved all office problems,” said Thomas Mason, S&P Global’s lead analyst.
The challenges are more pronounced for regional banks, which hold a larger proportion of CRE loans on their balance sheets compared to global lenders.
Investor Concerns and Fed Interest Rates
Investor fears about regional banks’ CRE exposure resurfaced last month when credit market concerns emerged, triggering a sector-wide sell-off.
Lenders have been buying time by extending loans and hoping that Federal Reserve interest rate cuts will alleviate borrower pressure. However, it’s unclear how long this strategy can last with a December rate cut now uncertain.
CRE loan rates typically follow long-term Treasury yields rather than short-term policy rates, meaning Fed rate cuts take time to impact borrowers.
Even with two rate cuts since mid-September, new CRE loans issued in 2025 will have an average interest rate of 6.24%, compared to 4.76% for loans maturing this year, according to S&P Global.
Key Questions and Answers
- Q: How are US regional banks’ CRE loan portfolios performing? A: Despite concerns from a few deteriorating loans, regional banks’ CRE loan portfolios have shown resilience.
- Q: What challenges does the office sector face? A: Office demand remains low due to altered work habits caused by the Covid-19 pandemic, and delinquency rates are at record highs.
- Q: How have lenders responded to these challenges? A: Lenders have reduced office loan concentrations and extended loans, hoping for relief from Fed interest rate cuts.
- Q: Why are investors concerned about regional banks’ CRE exposure? A: Investor fears stem from credit market concerns and a potential lack of relief from Fed rate cuts.
