Bank CRE Default Rate Falls Below 1%

WASHINGTON, DC—This past quarter commercial real estate bank lending reached a happy milestone: the default rate for both multifamily and commercial loans fell below 1% for the first time since 2007, according to a quarterly report by Chandan Economics that will be released this week.

Specifically, the combined multifamily and commercial default rate declined to 0.9% in Q2 2015. Broken out, that translates into a multifamily default rate of 0.3%, lower than the pre-crisis peak in 2006 and 2007 and a commercial default rate of 1.1%.

Following are some highlights of the soon-to-be reports, plus one caveat, or rather concern.

According to the report:

• Construction lending has seen the largest improvement as banks have worked through their legacy exposures, falling from a peak default rate of 16.8% to 1.6% in Q2.

• Banks' nominal-dollar exposure to multifamily and commercial real estate set a new all-time high in Q2, reaching $1.49 trillion. That's about 14% higher than the previous cycle's peak.

• The rate of growth in bank multifamily lending has been slowing. Year over year, bank multifamily lending was up 11.8% in the second quarter, compared to a peak growth rate of 15.9% in Q2 2014.

• The growth in commercial -- that is, minus multifamily -- lending is overweighted to income-producing properties. The balance of commercial income-producing property loans increased 6% year over year. Lending on owner-occupied properties has made smaller gains, increasing by 2.1% over the same period.

• Construction lending accelerated slightly in the second quarter, with net construction loans increasing for the ninth consecutive quarter. But the overall trend remains subdued as compared to previous cycles' construction lending recoveries.

And now for CEO Sam Chandan's concern. The report captures the continuing growth in lending. It would be good to remind people here that the improvement in the default metric reflects both the declining balance of non-performing loans as well as the growth in net new bank lending.

Banks' lending in the multifamily and commercial categories increased by $22.2 billion in the second quarter while net construction lending increased by $9.7 billion.

Simply put, comparing the new lending data with underwriting trends, "we remain concerned about the direction of loan quality," Chandan told GlobeSt.com. "The market is increasingly competitive; banks are stepping up to hold onto their market share and are introducing refinancing risks to their balance sheets in the process."