What to Make of 2Q Commercial Real Estate Loan Data

There is almost $1.4 trillion of commercial mortgages set to mature in 2023 and 2024 and D.C. appears to finally be taking steps to address the concern for potential delinquencies (“Proposed House Bill Would Address Cancellation of Debt Income for Distressed Commercial Real Estate Owners“).  S&P Global published commercial real estate loan data from the second quarter today.  Highlights from their report include:    

• The delinquency ratio on commercial real estate loans at U.S. financial institutions rose again, to its highest level since the third quarter of 2021.  
• Commercial real estate loans grew more prominent on U.S. financial institutions’ balance sheets, increasing to approximately 10.5% of total assets and 20% of total loans.
• Merger and acquisition activity impacted commercial real estate loan balances at several large U.S. financial institutions relative to one year earlier.
• Markets continue to express concern about commercial real estate lending, especially within the office sector.

Earlier this summer, the Office of the Comptroller of the Currency issued inter-agency guidance regarding commercial real estate loan accommodations and workouts.  Three points from this guidance worth emphasizing:

• Financial institutions should work with borrowers to find mutually beneficial solutions to help prevent foreclosures or bankruptcies.
• Financial institutions should perform sound credit analysis and underwriting practices before granting new loans or approving loan modifications. This is often referred to as a tightening of credit underwriting practices, or to say it differently, making it harder for applicants to qualify for loans.
• Financial institutions need to be proactive in working with borrowers, to find solutions that help keep the borrower’s property in productive use, and maintain the safety and soundness of the institution.

“I caution those that try to paint with too broad of a brush.  Not all financial institutions are the same.  Not all commercial real estate loans are the same.  All product types bring their own unique challenges.”  

Susan Sabo, Managing Partner of Financial Services

Sources: S&P Global, Office of the Comptroller of the Currency