Delinquent CRE Loans Are on the Rise: The Kiplinger Letter

Banks are expanding their efforts to restructure CRE loans to avoid losses from the commercial real estate sector.

Delinquent commercial real estate (CRE) loans at U.S. banks are on the rise. The volume of past-due loans in which commercial proprietors missed more than one payment jumped 36% in the third quarter.

Borrowers have struggled lately to refinance their loans amid declining property values and rising interest rates. Bank lending remains in historically good shape despite the delinquencies. But past-due CRE loans will continue to increase as long as property values remain under pressure, particularly those in the beleaguered office market.

Banks are stepping up efforts to restructure CRE loans to avoid losses. For example, the volume of loans in which Bank of America has either forgiven interest or extended due dates rose by nearly $750 million in the third quarter. Many banks are also setting aside more money to cover expected losses from their CRE portfolios.

The Office Market
The office market is still under pressure as the vacancy rate remains high. The national office vacancy rate reached 19.2% in the third quarter, up from 18.9% in the second quarter. The office market also saw another quarter of relatively stagnant rent growth. Asking rents rose 0.08%, while effective rents climbed just 0.04%. Both have been flat for the past year, with demand for office space still unstable.

New office construction is on track to finish below the historical average. A key contributor to the problem is that many folks still work from home. Around 26% of households have one person who works from home at least one day of the week, according to recent Census data. But fewer folks are doing so full-time, suggesting that many companies are still shifting toward a hybrid work arrangement.

The good news is that most cities are now seeing workers return to the office. Apart from Boston, Houston, Miami, San Francisco and Washington, D.C., the share of folks working from home has fallen over the last year in all major metro areas.

However, office financing will dry up as demand for office-backed bonds drops. Delinquency rates for commercial mortgage-backed securities focused on office loans rose to 4.6% in October., the highest since 2018, causing many investors to steer clear.

Article courtesy of The Kiplinger Letter

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