In a recent address to the European Central Bank Forum on Central Banking, Federal Reserve Board of Governors Chair Jerome Powell stated that the U.S. central bank is paying close attention to financial institutions that are heavily exposed to the commercial real estate sector. Powell also commented on the “surprising level” of exposure concentrated within U.S. regional banks.
“The way it lays out is the large banks don’t have large concentrations of commercial real estate,” Powell said. “That’s a good place to start. A surprisingly large part of exposure to commercial real estate is in the banks that are under $100 billion. There the worry is more banks that have a high concentration, and they are relatively few. So, it’s something that we’re carefully monitoring. Bank supervision has a playbook for this, so supervisors are talking to banks about their concentration in real estate and what they can do and how do they manage themselves out of this.”
According to the latest data from the Federal Reserve Bank of St. Louis, commercial real estate loans amount to $2.9 trillion as of May. As of March, approximately 80 percent of all commercial real estate loans are currently held by small and mid-size banks – banks with less than $250 billion in assets – according to data from Goldman Sachs.
In the first quarter of 2023, commercial real estate loan delinquencies rose 12 basis points to 0.77 percent, which S&P Global Market Intelligence characterized as a “sharp rise in a small time frame.”
“The delinquency rate on nonowner-occupied nonresidential property loans has increased for the past three quarters, with the 24 basis point rise in the latest quarter being the largest sequentially since the 20 basis point rise in the fourth quarter of 2020,” the S&P report read. “Investors come under increased scrutiny of loans tied to office buildings, and banks are exercising caution over CRE loans, which could increase stress on borrowers and pressure policymakers to intervene.”
S&P noted that a total of 576 banks are now considered “overexposed” because of investments in commercial real estate.