Overdue commercial real estate loans at US banks increased to another cycle peak as lenders absorb charge-offs in the troubled office sector and pushed-out expectations for rate cuts keep the pressure on borrowers facing maturities.

The commercial real estate (CRE) loan delinquency rate across the industry increased another 12 basis points sequentially to 1.15% in the fourth quarter of 2023, according to data from S&P Global Market Intelligence. That compares with quarterly delinquency rates of 50 basis points to 68 basis points in 2018 and 2019, and an early-pandemic high of 1.02% in the fourth quarter of 2020, when stress centered on sectors like hotels.

Banks including Wells Fargo & Co. and PNC Financial Services Group Inc. have said that strains are largely confined to the office sector, however, and expressed confidence that they have already set aside sufficient reserves to absorb charge-offs after large builds.

Meanwhile, some analysts believe that a buoyant economy could enable CRE to power through. "The sturdy pace of recent economic growth appears to be bolstering commercial real estate (CRE) demand. Outside of the office market, net absorption continues to be positive," Wells Fargo economists said in a Feb. 26 note, referring to the pace at which tenants occupy new space. "In short, dark clouds continue to loom, however the potential for a soft landing and lower interest rates are promising green shoots for 2024."

– For a spreadsheet with the data in this article, click here. – Set email alerts for future data dispatch articles. – Download a template to generate a bank's regulatory profile.

Pulling back

CRE loan growth has continued to drop as the delinquencies have mounted.

Year-over-year growth across US banks was 2.9% in the fourth quarter of 2023, the lowest level in a decade except for 1.8% in the first quarter of 2021.

In the Federal Reserve's most recent survey of senior loan officers, banks said they continued to tighten CRE standards, though the net percentage reporting sequential tightening declined compared with the previous four quarters for loans in each of the multifamily, nonfarm and nonresidential, and construction and land development sectors.

On balance, banks also reported that they expect to further tighten standards in each sector in 2024, though most respondents said they expect to keep standards about the same: 61.5% in multifamily, 72.7% in nonfarm and nonresidential, and 63.6% in construction and land development.

Concentrated in CRE

The number of banks exceeding regulatory guidance for CRE concentration fell for the third consecutive quarter, dropping by 11 sequentially to 532 in the fourth quarter.

Heavy concentrations have hurt some banks, with a tumble in shares at New York Community Bancorp Inc. reflecting concerns about its large exposure to rent-regulated multifamily buildings. The bank has said it is working to reduce its CRE concentration as quickly as it can.

The composition of CRE exposure can matter greatly, however. For example, regulators' Feb. 16 report on their review of shared national credits found that while commitments flagged for weaknesses or actually generating losses in the office sector have climbed sharply compared to 2021, they have fallen for the retail sector and plummeted for hotels.

Biggest banks

CRE loans increased a median of 5.6% from the year prior across the 20 banks with the largest CRE portfolios, though a number of the increases reflected acquisitions.

Excluding banks with major acquisitions, the median increase was 0.6%, and seven banks posted year-over-year declines.

Analysts at DBRS Morningstar are relatively sanguine about the ability of large regional banks, or those with between $10 billion and $1 trillion of assets and operations in multiple states, to weather CRE problems.

"We expect troubles in CRE to weigh on U.S. banks' financial performance, but this process will take multiple years with losses spread out, as banks work through maturing loans," they said in a Feb. 15 note. Nevertheless, because of their earnings power, credit loss reserves and capital positions, "they should be able to work through these problems."