The commercial real estate loan delinquency rate at US banks increased quarter over quarter, while the industry's total CRE loans also rose during the first quarter of 2023.

The delinquency rate increased sequentially by 12 basis points to 0.77% at the end of March, the highest since the 0.83% seen during the third quarter of 2021, an S&P Global Market Intelligence analysis found. On an annual basis, the delinquency rate was up 5 basis points.

Regulators define commercial real estate loans as construction and land development loans + multifamily loans + nonowner-occupied nonresidential property loans + commercial real estate loans secured by collateral other than real estate.

Total CRE loans at US banks grew by 0.5% to $2.436 trillion as of March 31, from $2.422 trillion at the end of 2022.

Only multifamily CRE loans edged lower sequentially, hitting $593.09 billion at quarter-end. Construction and land development loans were at $479.69 billion, nonowner-occupied nonresidential property loans and CRE loans secured by collateral other than real estate stood at $211.87 billion.

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Total nonowner-occupied nonresidential property loans totaled $1.151 trillion, accounting for nearly half of all CRE loans in the industry.

The delinquency rate on nonowner-occupied nonresidential property loans has increased for the past three quarters, with the 24 basis point rise in the latest quarter being the largest sequentially since the 20 basis point rise in the fourth quarter of 2020.

Investors come under increased scrutiny of loans tied to office buildings, and banks are exercising caution over CRE loans, which could increase stress on borrowers and pressure policymakers to intervene.

Number of banks with CRE exposure rises

A total 576 US banks exceeded regulatory guidance on CRE loan concentration by the end of the first quarter, an increase of 30.3% compared with a year earlier.

Regulators increase their scrutiny of banks that exceed either of two thresholds: construction loans with at least 100% of risk-based capital, or CRE loans with at least 300% of risk-based capital levels and 50% growth in CRE over the past 36 months.

Three new entrants

Umpqua Bank joined the list of the 20 largest US banks to exceed the CRE guidance. Its CRE loans represented 324.5% of tier 1 capital plus allowance for loan and lease losses at quarter-end while its CRE loan balance grew 68.6% in the 36 months as of March 31.

The bank's parent company, Umpqua Holdings, completed a reverse merger transaction with Columbia Banking System Inc. on Feb. 28.

Neither Umpqua Bank nor Columbia State Bank, a subsidiary of Columbia Banking System, were above the regulatory threshold in the fourth quarter of 2022.

Miami-based City National Bank of Florida and Fargo, ND-based Bell Bank also joined the list. City National Bank's CRE loans represented 304.2% of tier 1 capital plus allowance for loan and lease losses, while its CRE loan balance in the 36 months period till March 31 grew at 75.7%.

Bell Bank's CRE loans represented 305.3% of tier 1 capital plus allowance for loan and lease losses and its CRE loan balance grew 57.6% in the 36 months.

New Jersey-based Valley National Bank, with $64.31 billion in total assets, was the largest bank to exceed the CRE guidance in the first quarter. Its CRE loan balance grew 77% in the 36 months ended March 31 and CRE loans represented 457.8% of tier 1 capital plus allowance for loan and lease losses.