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Bank Charge-Offs Rising for CRE Debt
Net charge-offs and delinquency rates for bank-held commercial real estate (CRE) loans increased in the second quarter, with all major commercial property types showing greater distress, Trepp reported.
Lender concern about risk, indicated by criticized loan rates, increased across multiple regions for most property sectors. As a result, the pace of origination volume has slowed dramatically, with Q2 2023 commercial mortgage origination volume at only about 60% of the pre-COVID average quarterly origination volume in 2019.
When a CRE loan on a bank’s balance sheet shows signs of serious trouble, the bank will “charge-off” all or part of the loan by absorbing the expected future losses on its balance sheet, explained Trepp. These charge-offs are not included in the delinquency figures that will be reported later in the analysis. To maintain consistency in accounting for future risks, once a loan has been charged-off, it is taken out of both the numerator and denominator of the delinquency rate.
The net charge-off amount for the office sector more than tripled consecutively in the previous two quarters, from $49 million in Q4 2022 to $149 million in Q1 2023 and $459 million in Q2 2023. The lodging and multifamily sectors have also seen increases in charge-off totals in recent quarters.
Despite the uptick in charge-offs across most property sectors in Q2, which are taken out of the delinquency rate, CRE mortgage delinquencies experienced another uptick, continuing the upward trend that started in Q4 2022. The total delinquency rate rose 12 basis points from 1.03% in Q1 to 1.15% in Q2. The serious delinquency rate, or the non-current loan rate, experienced an uptick of 17 bps, increasing from 0.78% in Q1 to 0.95% in Q2.
The office sector saw a dramatic rise in its delinquency rate in Q2, increasing from 2.7% in Q1 to 4.9% after seeing steady increases in the delinquency rate in recent years. Although lodging has shown the highest delinquency rate since 2020 due to the severe impact of COVID, it has improved, with the rate decreasing from 7.9% in Q1 to 6.3% in Q2.
- ◦Financing
