New Interest Rate Hikes Are Anything But Music To The Ears of Delinquent CRE Investors And Overleveraged Banks

At the end of 2022, credit card and auto delinquency rates continued to rise — at a rate 80 points higher than in the fourth quarter of 2021. 

So it should come as no surprise that the credit crunch has also infected commercial real estate (CRE) investors, who are struggling to pay their bills in 2023.

Fitch Ratings’ U.S. Commercial Mortgage Banking Security (CMBS) rate increased again in January, led by new office, mixed-use delinquencies and a continued high volume of late payments. 

Federal Reserve Chairman Jerome Powell’s warning this week that interest rates could continue to jump higher and sooner than expected will not soothe anyone’s current angst. In January, the Fed stated concern regarding the CRE space and its adaptability to higher interest rates, including commercial property markets' lofty valuations. 

According to the S&P Global Market Intelligence analysis, CRE loans more than 30 days past due and those in nonaccrual status constituted 0.65% of CRE loans at the end of 2022. That number was up from the delinquency rate of 0.58% as of Sept. 30. 

This week, Federal Deposit Insurance Corp. (FDIC) Chairman Martin Gruenberg told the Institute of International Bankers that he believes property values may also suffer. 

“The combination of lower operating income generated by office properties and a higher cost of financing, if they persist, would be expected to reduce valuations for these properties over time,” he said. 

Gruenberg also pointed to financing with whole loans on the balance sheets of banks being syndicated and sold, many of which “serve as collateral for CMBS.” He believes these factors, among others, are “early indications that delinquencies on office property in CMBS are starting to tick up,” though he says some of those default rates “remain low at this time.”

Regarding loans, the S&P analysis is concerned that higher interest rates or a recession would continue to affect leveraged commercial and industrial loans. Banks continue to battle being overleveraged, with S&P's intelligence unit finding that the number of U.S. banks exceeding regulatory guidance on CRE loans climbed to 567 at the end of 2022. Tops among them are Trustmark National Bank, whose construction and development loan concentration was 106% at year-end. Wells Fargo & Co. has also downgraded its commercial mortgage-backed securities from Favorable to Neutral.

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