A recent report by S&P Global Market Intelligence about CRE trends moving into 2025 said that bankers will “feel some pain in the CRE books,” especially as borrowers look to refinance and find that task increasingly harder.
The firm’s analysis of national property records found that the average interest rate on loans made in 2024 through August was 6.2%. Maturing loans, however, were an average of 4.3%. Refinancing means a nearly 200-basis-point increase. About $950 billion in CRE mortgages were expected to mature in 2024. The number will hit a zenith in 2027 at $1.26 trillion, based on data from CoreLogic, as GlobeSt.com previously covered.
The report also looked at how attention was focused on banks and CRE loan portfolios, as well as on some of the problems developing in life insurance companies and their investments in CRE debt.
For banks, the scrutiny comes from both regulators and investors when financial institutions have “outsized exposure to the CRE market as the asset quality of loans tied to the market slips further.” S&P Global did note that performance varies greatly among the subcategories and not all exposures are identical.
The framework of analysis comes from 2006 when regulators at the time said there were two different measures of whether a bank had high CRE concentration. One was whether CRE loans exceeded 300% of risk-based capital, which is regulatory capital plus reserves, and 50% or more CRE loan portfolio growth within 36 months. The other measure was if a bank’s construction and development loans exceeded 100% of its risk-based capital.
Banks meeting the CRE loan concentration guidelines hit a top 577 in the first quarter of 2023. It then began to descend. In 2024 Q2, the number was 482. These banks face “considerable scrutiny.” The decline was mostly due to slower CRE loan growth with higher interest rates, tougher lending standards, and regulatory pressure on banks to reduce their exposure.
From the data, one of the biggest areas of concern is delinquent loans on non-owner-occupied (loans to landlords), particularly for large banks with more than $100 billion in assets, where the figure is 4.94%. The next largest was owner-occupied for banks with less than $3 billion in assets, and then the delinquency rate was only 1.01%.
Banks are not the only lenders in the area. According to S&P Global’s analysis, life insurance companies had record mortgage loan exposure in the second quarter of 2024, reaching 13.73% of mortgages to total cash and invested assets. That said, nearly 99.6% of the commercial mortgages held were classified as being in good standing or when all basic original terms of the loans were being met.