A Breakdown of Lenders That Hold CRE Debt

In reality, banks only have about a third of the debt.

As Moody’s Analytics said last week, estimates by some sources that 70% to 80% of CRE loans were made by lenders with less than $250 billion in assets were, well, wrong.

“However, the 135 US regional banks (generally considered as those with about $10 billion to $160 billion in assets) hold just 13.8% of debt on income-producing properties,” says Moody’s. “The top 25 largest banks, which the Federal Reserve (Fed) considers “large”, hold 12.1%. The 829 community banks (with $1 billion to $10 billion of assets) hold 9.6%, and the remaining 3.2% is spread among the 3,726 very small local banks with less than $1 billion in assets.”

But, as some have asked, that’s 38.6% of CRE lending, so who owns the other nearly two-thirds?

Moody’s had more of a breakdown in its previous report as well. Agencies and government-sponsored enterprises (GSEs), through their portfolios and mortgage-backed securities (MBSs), hold the largest share of the income-producing multifamily and commercial real estate loans at 21.0%.

Next are life insurance companies, which are involved with longer-term mortgages as a way of hedging against inflation while preserving access to cash at pre-determined times. They have 14.7% of the loans.

Next come asset-backed securities, including CMBS and CDO categories. Those taken together cover 13.3% of the loans.

Wrapping up the 12.4% balance is “others.”

“Part of the overstated exposure of CRE to the regional bank lending market stems from the discussion around the Fed stress testing limits changing in 2018 to be restricted to only banks with greater than $250 billion in assets,” Moody’s wrote. “However, even when considering that the threshold for potential liquidity troubles, banks with less than $250 billion in assets, including the thousands of small banks, still only account for 29.9% of CRE debt, as opposed to 65-80%. It is possible the latter numbers are meant to be stated as CRE debt holdings less than $250 billion as a share of all bank CRE debt holdings. But, that would not be a correct way to view the overall lending sources for CRE borrowers.”

In other words, there is no single point of failure that would doom either borrowers or lenders. Moody’s notes that if small- and mid-sized banks stopped lending—which they don’t appear to be doing—then the CRE market would feel strain. But as the above breakout shows, there is significant diversity in the CRE debt market and “large banks and various non-bank lenders such as mortgage REITs, life insurance companies, and private bridge lenders could step in at fill a potential gap.” CMBS will feel some disruption from rate hikes but remains a source. As for the small and mid-sized banks, relatively few have the characteristics of Silicon Valley Bank or Signature Bank, so likely can continue to lend.