{"id":1004676459,"date":"2023-08-16T10:31:32","date_gmt":"2023-08-16T18:31:32","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004676459"},"modified":"2023-08-21T01:59:59","modified_gmt":"2023-08-21T09:59:59","slug":"banks-get-a-warning-about-cre","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/banks-get-a-warning-about-cre\/","title":{"rendered":"On the News: Banks Get a Warning About CRE"},"content":{"rendered":"
\"\"<\/a>

Therese Fitzgerald<\/p><\/div>\n

Despite higher interest rates and mounting concerns about the economy, banks\u2019 holdings of CRE loans continued to grow throughout 2022 and the first quarter of 2023, according to the FDIC\u2019s annual Risk Review<\/a> issued on Monday.<\/p>\n

The industry\u2019s median ratio of CRE loans to capital climbed from 185 percent to 194 percent during the period, with every FDIC<\/strong> region reporting an increase in their median concentrations of CRE loans. The West recorded the highest concentration at 281 percent and the Northeast was not far behind with 241 percent.<\/p>\n

Banks\u2019 affection for commercial real estate in the face of rising pressures is not that surprising when you consider that CRE loan holdings for banks have grown every quarter since 2013, as the report notes. But a turning point in the relationship, or at least a pause, seems to be underway, particularly when it comes to office properties.<\/p>\n

Second-quarter FDIC figures are not out yet, but the agency\u2019s report foreshadows a change that will most likely bear out in the figures. While noting aggregate asset quality remains high, the FDIC finds escalating rates, a worsening economy and office market refinancing difficulties pose a risk to bank CRE portfolios that will “dampen\u201d loan growth. As a result of rising concerns, it advises banks to implement \u201cstrong risk management practices\u201d to maintain healthy loan portfolios.<\/p>\n

The FDIC cited the Fed\u2019s April survey of bank loan officers, which indicated that commercial real estate underwriting was already tighter and that demand for CRE loans was weaker. And since then, concerns about CRE risk and banks have only risen.<\/p>\n

\"\"<\/a>

The report focuses concern on deteriorating conditions in the office market amid higher interest rates and a weakening economy.<\/p><\/div>\n

Four months ago, for example, Moody’s<\/strong> downplayed the potential impacts of troubled real estate loans<\/a> and a handful of regional bank collapses on the banking sector as well as the impact of a potential banking pullback on CRE.<\/p>\n

While conceding that CRE loans figure large for the banking sector, the credit agency noted that leverage was lower than it was in the pre-GFC era, and asset appreciation during this cycle provided \u201cmore cushion.\u201d Meanwhile, Moody’s noted, banks accounted for only<\/em> 38 percent of CRE lending, and borrowers had a wider variety of capital choices today.<\/p>\n

Last week, according to Reuters, Moody\u2019s downgraded the credit ratings of 10 small and mid-sized U.S. banks<\/a> and put six large U.S. banks on notice, citing elevated exposure to commercial real estate, higher interest rates and economic worries.<\/p>\n

Risks all around<\/h2>\n

Of course, the report is not the only signal from the agency that banks need to rein in commercial real estate risk. The FDIC has joined with the Federal Reserve and the Office of the Comptroller of the Currency to propose increased capital reserves for large banks making certain types of real estate loans.<\/p>\n

\n

Read also:<\/strong> Amid CRE Default Concerns, Bank Capital Rules to Change<\/span><\/a><\/p>\n

\n

Further, commercial real estate was not the only risky area of lending noted by the FDIC in its Risk Review. Crypto presents \u201cnovel and complex risks\u201d to banks, for example, while cyber security threats and climate change also heighten the potential for trouble, the report finds. Here are six other key takeaways from the FDIC report regarding CRE:<\/p>\n

    \n
  1. Ninety-eight percent of banks held CRE loans, and CRE was the largest loan category for almost half of all banks.<\/li>\n
  2. CRE loans comprised 25 percent of total loans held by banks at the end of the first quarter, and 13 percent of total bank assets, The percentage of CRE loans mirrors the industry\u2019s peak in 2009, but during 2022 and the beginning of 2023, CRE was 13 percent of bank’s total assets vs. 14 percent in 2009.<\/li>\n
  3. Community banks hold 28 percent of banks\u2019 CRE loans while holding only 15 percent of loans overall. More than 29 percent of community banks saw their concentration of CRE loans enlarge.<\/li>\n
  4. Banks lent more on CRE across the property spectrum, and grew its unfunded loan commitments, which are mostly in construction and development. Since construction and development is the \u201criskiest\u201d type of loan in the FDIC\u2019s view, the agency cast doubt about whether many of these commitments will ever be funded.<\/li>\n
  5. Nonfarm nonresidential real estate properties\u2014basically income-producing commercial properties\u2014made up the largest portion of CRE loan portfolios at 58 percent. Multifamily is the second-largest CRE loan category despite a slight dip in the first quarter of 2023. About 16 percent are construction and development loans.<\/li>\n
  6. Aggregate asset fundamentals are holding\u2014with all property types except office seeing an improvement in their fundamentals\u2014and delinquencies are still relatively low. But CMBS delinquency rates, a key indicator for banks, ticked upward in 2023 due to stress in the office sector, and special servicing increased, particularly among office properties.<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

    The FDIC’s 2023 Risk Review portends a shift in banks’ growing preference for CRE.<\/p>\n","protected":false},"author":756,"featured_media":1004676562,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21684],"tags":[33033],"class_list":["post-1004676459","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-viewpoint","tag-moodys-investors-service"],"acf":[],"yoast_head":"\nOn the News: Banks Get a Warning About CRE - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/banks-get-a-warning-about-cre\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"On the News: Banks Get a Warning About CRE\" \/>\n<meta property=\"og:description\" content=\"The FDIC's 2023 Risk Review portends a shift in banks' growing preference for CRE.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/banks-get-a-warning-about-cre\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2023-08-16T18:31:32+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-08-21T09:59:59+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2023\/08\/FDIC_Risk_Report_Cover.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"800\" \/>\n\t<meta property=\"og:image:height\" content=\"620\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Therese Fitzgerald\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/banks-get-a-warning-about-cre\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/banks-get-a-warning-about-cre\/\",\"name\":\"On the News: Banks Get a Warning About CRE - 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She got her start writing about the New York City market with Real Estate Weekly and later joined CPE\u2019s predecessor publication, Commercial Property News, where she held various positions including editor in chief. In addition to working on the CPE and MHN websites, she edits CPE's Capital Markets Newsletter and MHN's Finance & Investment Newsletter. 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