Policy and economic uncertainty weighed on commercial real estate loan performance in the second quarter, though positive indicators emerged—including a rebound in mortgage origination volumes and a third consecutive quarter of declining delinquencies in the office sector, according to a new report from Trepp.f
Office loans backed by older or underperforming properties are expected to continue facing challenges, likely requiring restructurings or distressed sales. Meanwhile, bank multifamily loan performance is expected to diverge, with oversupplied markets seeing a rise in criticized balances, while high-demand, growth-oriented markets are expected to stabilize.
Origination volumes increased in Q2, extending a trend that began in late 2023 and persisted throughout 2024. Despite economic headwinds, bank credit growth and active issuance from life insurers and CMBS lenders point to an improving outlook for CRE credit performance. Trepp notes that CRE delinquencies appear to have plateaued, and continued interest rate cuts from the Federal Reserve could help ease financing costs.
Among Trepp’s data consortium, origination levels in Q2 were comparable to those seen early in the pandemic, with multifamily and office sectors leading by dollar volume.
“Taken together, the origination trend through economic cross currents suggests banks’ growing appetite for risk-taking,” Trepp stated.
Banks continued to make progress in addressing distressed office loans. The cumulative balance of charged-off bank CRE office loans fell to just under $800 million in Q2, down from $933 million in Q1. Trepp said the two-quarter decline suggests the cycle may have bottomed, signaling early signs of a recovery. Other sectors have been less active in terms of charge-offs, though multifamily charge-offs remain elevated compared to historical norms, despite declining to $114 million, down from the previous quarter’s peak.
CRE loan delinquencies held steady for the third consecutive quarter at 1.94%, while the serious delinquency rate—tracking all loans not current on payments—inched up slightly to 1.7%, from 1.68% in Q1.
The office sector’s delinquency rate declined for the third consecutive quarter, although it remains elevated compared to other property types. Multifamily delinquency also improved, falling 18 basis points to 1.4%, down from 1.58% in Q1. In contrast, industrial and retail delinquencies rose, up 28 and 32 basis points, respectively.
The Washington, D.C., New York City and Dallas metro areas continue to host the nation’s largest office markets and some of the highest levels of criticized loans. However, these markets have shown improvement in Q2. Most other metros also saw improvements, though Atlanta and Houston stood out with increased criticized loan balances.
“The office sectors in these regions are weighed down by maturing loans, with relatively strict lending criteria making refinancing difficult,” the report noted.
“Among the largest multifamily markets, the level of criticized loans remains elevated—especially in several Sunbelt metros—but conditions are improving in most top markets.”
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