As the U.S. economy grapples with ongoing uncertainties, regional banks are gearing up for challenges in the commercial real estate (CRE) sector. With lingering effects from the collapse of Silicon Valley Bank and Signature Bank still reverberating, industry experts anticipate increased caution and strategic maneuvers in the coming months.
U.S. regional banks, in particular, could face mounting pressure in the CRE market, prompting them to allocate more funds to cover potential losses and engage in proactive measures to mitigate risks. Multifamily loans, a significant portion of regional banks’ portfolios, are raising concerns, especially following New York Community Bank’s surprise fourth-quarter loss due to its real estate portfolio.
Impact of remote work
The long-term effects of the pandemic, coupled with remote work arrangements, have significantly impacted the demand for office spaces, leading to higher vacancies and challenges in mortgage repayments for building owners. Additionally, the Federal Reserve’s stance on maintaining higher interest rates poses further financial strain on financing costs, exacerbating existing challenges in the sector.
Non-performing CRE loans
U.S. banks’ non-performing CRE loans doubled to 0.81 percent by the end of 2023 from 0.4 percent in 2022, according to the International Monetary Fund. Therefore, analysts and investors are predicting higher reserves. Morgan Stanley forecasts a 10- to 20-basis point increase in CRE reserve ratios for regional banks this year. Notably, CRE holdings make up 13 percent of U.S. large banks’ balance sheets and 44 percent of regional banks’, an Ares Alternative Credit report stated.
Read: EIB approves $4.57 billion for business, climate action and energy across Europe
Banking sector’s outlook
Delinquency rates in the CRE sector have doubled over the past year, prompting concerns among investors and rating agencies. S&P Global Ratings downgraded the outlook for several U.S. banks in response to stress in CRE markets, highlighting potential implications for asset quality and performance. This sentiment is reflected in the decline of the KBW regional bank index compared to broader market indices.
While analysts anticipate further adjustments and potential write-offs in the CRE sector, they do not foresee immediate turmoil in the banking sector. Instead, the industry braces for a gradual transition characterized by cautious decision-making and strategic asset management to weather the evolving economic landscape.
For more news on banking & finance, click here.
