Big Banks Face Bigger CRE Challenges Than Smaller Lenders

Commercial Real Estate (CRE) Lending Landscape

The prevailing belief has been that smaller banks bear the brunt of commercial real estate (CRE) lending troubles. However, recent data reveals that big banks are currently showing more significant cracks in their lending portfolios.

Key Insights:

• Loan Exposure: While smaller banks hold a substantial share of CRE and multifamily property debt in the U.S., it is the top 25 largest banks that are experiencing more loan delinquencies. Various factors, such as loan purpose and property type, influence the performance of these loans.

• Delinquency Disparities: According to S&P Global Market Intelligence, loans for non-owner-occupied properties held by banks with over $100 billion in assets show higher delinquency rates. In Q1, over 4.4% of these loans were either delinquent or in nonaccrual status, compared to less than 1% for smaller banks and owner-occupied loans. However, delinquencies in multifamily properties are lower than every other CRE asset class except for industrial properties.

Source: CMBS Special Servicing Rate Jumps Up to Begin 2024, Analyzing Spikes and Transfers

• Interest Rates Impact: The rising interest rates play a crucial role. Owner-occupied CRE loans tend to perform well if the business can make payments. However, leased properties are more sensitive to interest rate hikes. When rental income fails to cover the rising loan costs or refinancing becomes problematic, delinquencies increase.

• Geographic Differences: Geography also influences delinquency rates. Larger banks, often lending in downtown areas, face more immediate maturities. According to MSCI Real Assets, national banks held 29% of maturing office debt last year and 20% this year, while regional banks held 16% and 13%, res pectively. Banks nearing balloon payments must carefully evaluate repayment risks.
  

Big banks are currently facing growing challenges in their CRE loan portfolios, with a net charge-off rate for non-owner-occupied CRE loans hitting 1.1% in Q1, significantly higher than the rates for smaller banks. While the current downturn predominantly impacts larger banks, smaller banks could face increased exposure if conditions worsen.

Conversely, if high interest rates persist alongside a stable economy, smaller banks might uncover hidden value in their loan portfolios.