The latest semiannual Supervision and Regulation Report from the Federal Reserve has revealed that most banks have more than the required regulatory capital levels, with “generally … sound” asset quality. But there’s also less positive news on the CRE front — regarding office, in particular.
The Fed wrote that CRE lending credit performance “remains an area of concern.” The report looked at delinquency rates for industry loans. They include properties at least 90 days past due or those in nonaccrual status, which means formally restructured “ to ensure repayment and performance need not be maintained, by the Fed’s definition.
According to the graphs in the report (individual numbers aren’t necessarily available), CRE delinquency rates were under 0.5% pre-pandemic. They climbed to nearly 0.8% by mid-2020. Then, the Fed cut interest rates as a response to the health crisis. By the middle of 2022, delinquency rates were back to their pre-pandemic levels. However, inflation and increased interest rates sent them back upward to more than 1% by the end of 2024 Q2, the highest rate since 2014.
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When looking at income-producing CRE property types, hotel delinquency rates continued to lower. Retail was slightly down. Multifamily and industrial grew a bit. Office, however, shot up to more than 10% in Q2. More specifically, “loans secured by offices, especially those in major cities, remained the top concern,” the report said.
The problems are concentrated at large banks. Office delinquency rates were 11% in Q2, although smaller banks, which typically held higher shares of assets in CRE loans, also saw a delinquency rate increase.
Banks are increasing provisions against CRE loan problems, which leaves less capital to lend for the industry, and likely less appetite as well.
On the CMBS front, Moody’s delinquency tracker saw the overall level for CRE rise from 6.88% in September to 6.94% in October, a six-basis-point increase. Multifamily was up 43 basis points to 2.76%, hotel fell 62 basis points to 5.42%, but office jumped 56 basis points to 10.35%. The latter compares to just 5.14% in October 2023.
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