In an Unusual Move, Big Bank Balance Sheets Shrink CRE Lending

There’s been a big shift in commercial real estate lending.

“According to the Federal Reserve, in August large domestic banks saw their aggregate loan balances tighten for the first time since January 2022, and their loan balances have declined further over the first two weeks of September,” wrote CoStar’s national director of Capital Markets Analytics, Chad Littell, in a copy of a report sent to GlobeSt.com. “Commercial real estate loans at large banks fell 0.3% in the week ending Sept. 13, driven largely by nonresidential segments.”

Data from the Fed for the week ending September 13, 2023, made it clear. Commercial real estate loans for all commercial banks were $2,941.8 billion, not seasonally adjusted. Several weeks before, on August 23, 2023, the amount was $2,941.6 billion. And in August 2022, the amount was $2,726.0 billion.

For small domestically chartered commercial banks, the amounts were $1,950.4 billion on September 13; $1,944.8 billion on August 23, 2023; and $1,737.9 billion in August 2022.

For large domestically chartered commercial banks, the amount for September 13, 2023, was $884.6 billion; $890.0 billion for August 23; and $887.1 billion for August 2022.

As percentages of the totals, the large banks were as follows: 17.6% in August 2022, 16.5% on August 23, 2023; and 16.5% on September 13.

The percentages for the small banks were 34.5% in August 2022; 36.1% on August 23, 2023; and 36.2% on September 13, 2023.

The percentages of all commercial real estate loans that small and regional banks represented have grown over time, possibly picking up some of the pullback by the large banks.

GlobeSt.com chose non-seasonally adjusted figures to get a more accurate measure, undistorted by the assumptions in seasonally adjusted numbers.

“A closer look at the divergence shows annual loan growth at regional and community banks averaged 9.7% over the past eight years, while large bank commercial real estate loan portfolios grew at one-quarter of that rate, increasing an average of just 2.6% since 2016,” Littell wrote.

“Despite the strong double-digit loan growth at the small bank level, the overall commercial real estate lending environment is becoming constricted,” Littell noted. “After reaching 18.2% annual loan growth in the first quarter of 2023, the pace of expansion decelerated rapidly among smaller lenders during the most recent six-month period.

“Considering this slower lending trend, the next four years will face the challenge of having to contend with an estimated $1.9 trillion in commercial real estate loan maturities,” he continued. “Of this total, approximately 47%, or $885 billion, are on bank balance sheets, and close to 20% of these loans are tied to office properties. As this troubled property sector continues to make write-downs, small bank lenders may end up following the lead of the national lenders and using capital for purposes other than originating new loans at the same blistering pace as in 2022.”