Commercial real estate is under increasing pressure due to rising interest rates and falling property valuations. Kenna Betancourt/VIEWpress
The reserves that big banks hold to cushion against loan losses have fallen below the value of their overdue commercial real estate debt, according to the Financial Times.
Commercial mortgage payment delinquencies have soared over the past year.
Among the big banks, commercial real estate loans that are 30 days or more delinquent jumped to $9.3 billion last year.
Last year, the amount of commercial mortgages that were 30 days or more late on payments exceeded the total reserves held by the largest U.S. banks.
Citing data from the Federal Deposit Insurance Corp., the Financial Times reported that average reserves for every dollar of commercial mortgage debt 30 days or more past due fell from $1.60 to $0.90 at major banks including Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo.
According to the Financial Times, the amount of delinquent commercial real estate debt held by big banks nearly tripled to $9.3 billion in 2023. Across the banking industry, delinquencies on loans secured by offices, shopping malls, apartments and other commercial properties more than doubled last year to $24.3 billion from $11.2 billion.
Commercial real estate fears have spread across the market over the past year, with more than $900 billion, or more than 20 percent of total U.S. commercial and multifamily real estate debt, due to come due this year. Billionaire real estate investor Barry Sternlicht recently predicted losses of $1 trillion in office properties alone.
Banks' exposure to the industry's turmoil has been in the spotlight since the collapse of several regional banks last March, but it has resurfaced in recent weeks after investors fled New York Community Bank's shares following disappointing earnings results. The share price collapse was driven in part by concerns about banks' holdings of commercial mortgage debt.
Meanwhile, the Federal Reserve has extended its schedule of interest rate cuts this year following a string of positive economic data, continuing to pressure the commercial real estate market as landlords are forced to refinance maturing debt at higher interest rates.
The Fed's head of banking oversight, Michael Barr, said last week that falling demand for office space and rising interest rates are putting pressure on commercial real estate valuations, particularly in the office sector.The central bank is keeping a close eye on banks' commercial mortgage lending to see whether they are making adequate provisions and have enough capital to mitigate future loan losses.
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