Key Takeaways:
- Big banks show higher delinquency rates in commercial real estate loans.
- Higher interest rates make leased properties more vulnerable to loan defaults.
- Smaller banks may benefit if interest rates stabilize and the economy remains steady.
What Happened?
Big banks are facing significant challenges with their commercial real estate (CRE) loans. Data from the first quarter reveals that over 4.4% of CRE loans at banks with more than $100 billion in assets are either delinquent or in nonaccrual status. This marks an increase of 0.3 percentage points from the previous quarter. In contrast, smaller banks have kept their delinquency rates below 1% for similar loans.
Why It Matters?
This disparity highlights the vulnerability of large banks to fluctuations in the CRE market, particularly for properties intended to be leased. Higher interest rates exacerbate these issues, making it more difficult for properties to generate enough income to cover loan payments.
According to Nathan Stovall from S&P Global Market Intelligence, owner-occupied CRE loans perform better as long as the borrowing business remains healthy. However, leased properties are far more sensitive to interest rate changes, affecting occupancy rates and rental income.
What’s Next?
Investors should monitor the performance of big banks closely, especially as many have already taken significant provisions for potential office-loan losses. The median first-quarter reserve ratio for office loans at major banks stood at 8%, significantly higher than the sub-2% loss allowance ratio across all insured banks.
If the economy maintains its current trajectory with high interest rates, smaller banks could find themselves in a favorable position, presenting potential investment opportunities. Conversely, if a property downturn hits smaller or suburban properties harder, smaller and regional banks might face unexpected challenges.
