US bank loans backed by owner-occupied commercial real estate properties have performed better on average in recent quarters than those backed by nonowner-occupied properties. The disparity stems largely from a sharp drop in the performance of large banks' nonowner-occupied commercial real estate loans.
The delinquency ratio for loans on owner-occupied properties was generally higher than for loans on nonowner-occupied properties in the years leading up to the COVID-19 pandemic, according to S&P Global Market Intelligence data. That trend began to reverse in 2020 when nonowner-occupied commercial real estate (CRE) loan delinquencies spiked, as widespread work-from-home policies depressed office usage.
The nonowner-occupied CRE loan delinquency ratio surpassed the ratio for owner-occupied properties in 2022, and continued to rise throughout 2023 while the delinquency ratio for loans on owner-occupied properties stayed mostly flat. Banks' net charge-offs on CRE loans also rose above the last decade's norms in 2023, in a trend driven by loans on nonowner-occupied properties.
The delinquency and net charge-off patterns appear to support recent years' conventional wisdom that loans on owner-occupied properties carry less risk, because property owners using their own space are more likely to stay current on their loans than those relying on tenants to pay rent.
However, there are sharp performance differences based on the size of the banks making the loans. At banks with less than $100 billion in total assets, loans backed by nonowner-occupied properties had lower delinquency ratios in the third quarter than those tied to owner-occupied properties. For banks larger than $100 billion in assets, the delinquency ratio for nonowner-occupied loans was far worse than the ratio for owner-occupied loans, shooting up by 101 basis points sequentially to 3.64%.
Banks with less than $3 billion in assets had greater exposure to owner-occupied loans in the quarter, with nonowner-occupied loans making up 58.4% of CRE loans, compared to about two-thirds of CRE loans at larger banks.
Several large real estate lenders are heavily focused on nonowner-occupied properties, including Morgan Stanley, Citigroup Inc., Wells Fargo & Co. and JPMorgan Chase & Co.
Goldman Sachs Group Inc.'s 97.0% concentration of CRE loans in nonowner-occupied properties applies to the $7.53 billion in CRE loans that the company reported in bank regulatory filings. Firmwide, the company said in an Oct. 17 investor presentation that it had $25 billion in CRE loans outstanding net of allowance for loan and lease losses at the end of the third quarter. That total includes roughly $4 billion of direct domestic construction and multifamily loans, $1 billion of direct foreign CRE loans and $13 billion of warehouse and other indirect CRE loans, a spokesperson said.
Goldman Sachs does not disclose the portion of the $25 billion that is nonowner-occupied, the spokesperson said. The company believes that the 30-plus day past due ratio on its firmwide CRE loans amortized at cost, 3.4%, is more indicative of its CRE delinquencies because it includes the entirety of Goldman Sachs' exposures.
Because the 17.26% delinquency ratio on nonowner-occupied loans in Goldman Sachs' $7.53 billion CRE loan portfolio includes loans that are not accruing interest but are still current, the firm does not consider the ratio a useful indicator of portfolio delinquency, the spokesperson said.
