Overdue commercial real estate loans at US banks jumped in the third quarter as high interest rates and office vacancies continued to put the portfolios under intense strain.
The commercial real estate (CRE) loan delinquency rate across the industry increased 21 basis points sequentially to 1.03% during the period, according to data from S&P Global Market Intelligence. That was the biggest sequential increase in at least five years and pushed the delinquency rate above its early-pandemic high of 1.02% in the fourth quarter of 2020.
Despite the stress, banks generally continue to describe CRE loan problems as manageable, with a number that have significant exposure to the office sector building loss reserves to the high-single-digit percentages for those loans.
CRE is "clearly an issue," Michael Roberts, president and CEO of HSBC North America Holdings Inc., said at a Nov. 16 conference. But it's "not nearly as bad as you would expect from what is I think being suggested by the press."
Click here for a spreadsheet with data used in this article.
Decelerating growth
Year-over-year CRE loan growth slowed to 4.6% in the third quarter, down from a recent peak of 12.1% in the third quarter of 2022 and lower than the growth that characterized 2018 and 2019.
In construction and development loans, year-over-year growth remained brisk at 11.2%, though this also reflected a deceleration from a peak of 16.5% in the fourth quarter of 2022.
Banks have been reporting tightening standards across CRE loan categories for at least six consecutive quarters in the Federal Reserve's survey of senior loan officers, and weakening demand for about as long.
"Where borrowers are not faced with imminent loan maturities, we expect them to avoid longer-dated, fixed-rate financing to the extent possible, at least until interest rates stabilize," analysts at BofA Global Research said in a Nov. 10 report on CRE loans that are packaged into securities.
Loan levels reflect trends in commercial property values, with prices falling for more than a year and still in considerable flux as transaction activity has crashed.
Less concentration
The number of banks exceeding regulatory guidance for CRE concentration fell for the second consecutive quarter, dropping by 22 sequentially to 546 in the third quarter.
Trustmark Corp., which exceeded the threshold for construction loans in the second quarter, was among the banks that dropped out of the group. Overall CRE loan growth has been rapid at Trustmark, with a year-over-year increase of 21.9% at unit Trustmark National Bank in the third quarter. A decrease in the bank's construction loan portfolio reflects some projects that have now been built and moved into other CRE loan categories.
Biggest CRE loan portfolios
CRE loans at the 20 banks with the biggest portfolios grew a median 7.2% year over year. However, the growth reflects major acquisitions by some banks.
At PNC Financial Services Group Inc. unit PNC Bank NA, CRE loans dipped 1.1% year over year to $49.45 billion. "Generally speaking, nobody wants the optics that they're growing their CRE portfolio because of all the negative blowback on that," CFO Robert Reilly said at a conference on Nov. 2.