CRE Lending and its Impact on U.S. Regional Banks

Commercial RE Lending by banks is one of the largest segments of available debt financing in the U.S. With the collapse of SVB, Signature Bank, and First Republic in conjunction with the Feds unprecedented rate hikes have all attributed to the focus of CRE lending and its impact on smaller regional banks.

Over 69 percent of commercial RE loans originated from banks with the smaller regional ones the predominate lenders. As a result, the Feds have taken a closer look at CRE concentration on bank balance sheets. The result was a proposed rule making for stricter bank capital requirements called the “Basel III End Game”.

Certain CRE sectors have been affected by office and hotel portfolios and more recently multifamily, especially the rent regulated sectors. CRE has $1.2 trillion in commercial mortgages set to mature over the next two years according to Goldman Sachs research. Notably with higher interest rates and increased capital reserve requirements the concern is how the maturing CRE loans will be resized and priced and able to meet their underlying debt service/ratio requirements. Add to this a tight credit market coupled by CRE pricing declines and upward spreads on cap rates. Moreover, recent loan sales have reflected notable discounts more than 30-35% with a reported flight of deposits to the twenty-five largest U.S. banks. The question arises with tightened lending standards, increased bank reserves mandates, and large exposure to CRE loans how will the smaller regional banks navigate the perfect storm?