December 19, 2023 | Stamford, CT — Risk levels and delinquencies are climbing in commercial real estate loans, and U.S. banks are expressing concerns about lending standards in CRE portfolios at levels not seen since the onset of the global pandemic. 

Risk levels in bank CRE portfolios have been climbing steadily since 2021. During that period, banks responded by tightening lending credit standards and reviewing underlying issues within their CRE portfolios. However, over the past three quarters, risk levels have climbed much more sharply, to 7.8% in Q3 2023, according to new data from Commercial Loan Analytics. 

Delinquency Rates on the Rise
Delinquency rates in bank CRE loan portfolios started climbing in Q3 2022. For the next three quarters delinquencies increased steadily but gradually. Then, in Q2 of this year, the increase in delinquencies accelerated, rising from just 1.06% to 1.34% in Q3 2023. CRE delinquency rates have not been at this level since 2014, when they were slowly tapering down from the highs of the Global Financial Crisis.

“As CRE delinquency rates rise, banks need to ensure they have enough capital on hand to offset these potential losses,” says Gregory Schneider, Director, Commercial Loan Analytics at Coalition Greenwich. “Given the current battle for deposits, some banks already facing constraints could struggle to come up with this additional capital.”

Tightening Credit Standards for CRE Lending
A sizable majority of banks participating in the October 2023 Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices have tightened credit standards on CRE loans. Banks with less than $100 billion in assets report the most pessimistic views on CRE lending. These smaller banks were more likely than larger peers to report that CRE credit standards were tightening considerably.

Given the outsized role smaller banks play in CRE lending, this finding has implications for both the health of the U.S. regional and community banking sectors and for the broader economy. CRE loan renewals have fallen over the past 12 months, and new CRE loan originations are down to an even greater extent, reflecting an increasingly difficult funding environment for CRE borrowers. 

“Banks are becoming more selective about which borrowers they choose to renew,” says Gregory Schneider. “If they are confident in the borrowers and the particular credit, banks are showing a willingness to accept heightened risk, but they are letting weaker CRE credits run off.”