The U.S. banking system continues to struggle with significant exposure to the commercial real estate market compounded by the challenge of high interest rates, putting it at risk as potentially troubled loans mature, according to an analysis by Florida Atlantic University.
Troubled debt restructuring from commercial construction, multifamily, owner-occupied and owner-non-occupied mortgages has tripled since 2023, reaching $18 billion in the fourth quarter of 2024, up from the $6 billion in the second quarter of 2023.
Although more than half of this amount is attributable to non-owner occupied nonfarm and non-residential, the FAU report said there is “serious deterioration” in multifamily and commercial construction loans.
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Fifty nine of the 158 largest U.S. banks face CRE exposure of greater than 300% of their total equity capital, as of the fourth quarter. According to data contained in FAU College of Business’ U.S. bank exposure screener, the financial institutions most at risk are Flagstar Bank, Zion Bancorp., Valley National Bank, Synovus Bank, Umpqua Bank and Old National Bank.
Among banks of all sizes, 1,788 have total CRE exposure greater than 300%, up from 1,697 during the third quarter. Nearly 1,000 have exposure that exceeds 400%, 504 are more than 500% and 216 are greater than 600%. The aggregate industry total CRE exposure is 132%, which remained unchanged from quarter-to-quarter.
“Regulators have been putting pressure on banks to reduce their exposures,” said Rebel A. Cole, a professor of finance in FAU’s College of Business. “However, it’s a very difficult thing to do without sending a signal of weakness to the market and creating more problems. To get around this, many banks are ‘extending and pretending’ by restructuring their loans.”
The extend and pretend strategy involves lenders extending maturing loans at their original terms for a year in hopes interest rates will fall enough over that time to allow them to refinance.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
