CRE loan delinquency still growing but at slower pace as lenders rework deal terms

Commercial real estate loan delinquencies are still rising but at a slower pace than they have been since the post-pandemic disruption in the industry.

Overdue commercial real estate loans tied to U.S. banks increased to 1.25% in the first quarter — a new cycle high, according to a recent analysis by S&P Global Market Intelligence. Even so, the quarter’s 10 basis-point increase from the prior quarter was slightly less than the 11 basis-point increase for the fourth quarter of 2023 and a 21 basis-point jump in the third quarter of last year.

Commercial real estate loan delinquencies are being closely monitored as the office market in particular is seeing drops in occupancy and value amid a higher interest-rate environment that looks likely to persist for longer than expected.

Many lenders have reworked terms with borrowers, including on troubled loans, or have extended the maturity date. Despite that, there’s palpable concern about what happens to the $929 billion in outstanding commercial mortgages across all CRE lender types the Mortgage Bankers Association estimates will mature this year.

“Although higher interest rates continue to challenge commercial real estate, there are plenty of reasons for cautious optimism that a turnaround is on the horizon,” Wells Fargo & Co. economists wrote in a May 28 note. “What’s more, the slower pace of price declines is a sign that the air of pessimism surrounding the asset class is beginning to dissipate as less restrictive monetary policy comes closer in view.”

But lenders remain cautious about their exposure to commercial real estate, prompting slower lending activity overall in the sector.

Year-over-year commercial real estate loan growth was 3% in the first quarter of the year. That’s a slight uptick from the 2.9% growth in the fourth quarter of last year but well below the 12.1% peak in the third and fourth quarters of 2022, according to S&P Global.

Brent Maier, real estate advisory leader at Baker Tilly, told The Business Journals in an interview last month traditional, regulated lenders are having to set aside or increase their reserves for potential write-offs or loan workouts.

“That effectively takes capital off the table to deploy into these real estate loans,” Maier said. “The second thing, too, is the appetite to deploy capital into real estate loans has decreased,” but, he added, there is capital available for creative financing, depending on a borrower’s relationships and appetite for cost.

Some banks have opted to sell their commercial real estate loan portfolios in an effort to reduce their exposure to the sector. Those deals may have contributed to the number of banks exceeding regulatory guidance for commercial real estate concentration reaching its lowest mark in the first three months of this year since the third quarter of 2021.

Among the 20 banks with the largest commercial real estate loan portfolios, CRE loans increased by a median 1.2% compared to the same quarter in 2023, according to S&P Global. JPMorgan Chase & Co. saw its commercial real estate loan portfolio grow 29.3% in the past year, thanks largely to its acquisition of First Republic Bank in May 2023.