CRE delinquencies are spreading beyond the office sector
The crisis in commercial real estate (CRE) is quickly spreading beyond office buildings, raising concerns about a delinquency spike across the real estate economy.
“CRE delinquencies are rising and spreading beyond the office sector,” wrote Peter Berezin, the chief global strategist of BCA Research.
Berezin shared a chart from CRED iQ showing a massive jump in delinquencies across various commercial property types.
Between March 2023 and August 2024, the percentage of multifamily buildings entering delinquency or transitioning to specially serviced loans jumped from 3.8% to 11%.
Over the same period, delinquencies in the industrial sector spiked from 0.4% to 4.6%, and hotel delinquencies increased from 6.3% to 8.4%. Retail delinquency rates declined slightly but remained above 10%.
Meanwhile, the share of office buildings in distress rose from 5% in March 2023 to 13% in August 2024.
The share of self-storage facilities that were delinquent jumped to 14.4% in January 2024, but the fire seems to have been put out before it got worse.
The overall CRED iQ distress rate, which measures the entire U.S. commercial mortgage-backed security market, reached a record 9.1% in August.
It was the “sixth straight record high,” wrote CRED iQ’s Michael Haas.
Rising delinquencies pose a serious risk to banks, which hold trillions of dollars in CRE loans.
“U.S. banks face a reckoning”
According to The Conference Board, a staggering $1 trillion in CRE loans are expected to mature over the next two years.
“Institutions with the most concentrated exposures, insufficient capital cushions, and limited lifelines from larger institutions or regulators face significant losses,” The Conference Board’s Dana M. Peterson wrote in an article for the Harvard Business Review.
Small- and midsized banks carry most of that “concentrated exposure.” Unlike the Wall Street megabanks, which have been quietly offloading their CRE loans in recent years, smaller institutions have much larger CRE portfolios relative to their capital.
Bloomberg flagged this issue earlier this year, determining that 22 small banks had reached a dangerous threshold on their commercial real estate loans.
For these banks, CRE loan balances were more than triple their capital.
Although these banks are much smaller in scale than the likes of JPMorgan, Wells Fargo, or Bank of America, they each hold between $13 billion and $61 billion in total assets.
According to the Pacific Investment Management Co. (PIMCO), it’s only a matter of time before these banks or others like them collapse due to their CRE loan exposure.
“The real wave of distress is just starting,” said John Murray, Pimco’s managing director.
The issue hasn’t gone unnoticed by lawmakers, who questioned Federal Reserve Chairman Jerome Powell about the potential fallout from a CRE loan crisis.
“There will be bank failures,” Powell told a Senate Banking Committee hearing in March.
“It’s not a first-order issue for any of the very large banks. It’s more smaller and medium-sized banks that have these issues. We’re working with them,” said Powell.
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