The commercial real estate sector is currently facing a massive wave of maturing loans, causing concern among investors and financial institutions alike. While many have been focusing on banks with high concentrations of commercial real estate exposure, it is important to delve deeper into the types of loans these institutions hold to truly understand the level of risk they face.
According to data provider Trepp, around 30% of outstanding commercial real estate debt is set to mature between 2024 and 2026. As these loans mature and property owners seek refinancing, they may be met with higher debt payments due to rising interest rates, potentially leading to defaults. This looming wave of maturing loans has already begun to weigh on bank stocks, exacerbated by the challenges posed by increasing interest rates.
Investors have traditionally used commercial real estate concentration levels to evaluate the risk exposure of banks, with many institutions trading below book value if their CRE concentrations exceed 300%. However, this metric may not provide a comprehensive assessment of risk, as evidenced by the increasing number of troubled loans even in banks with lower CRE concentrations.
Contrary to expectations, larger banks with assets exceeding $250 billion are experiencing an acceleration in past due loans despite having lower concentrations of commercial real estate. This trend is largely attributed to their exposure to high-profile office properties in major metropolitan areas, which have been significantly impacted by the pandemic and shifting dynamics of the workplace.
The risk of default from office properties appears to be directly correlated with the size of the property, with larger buildings facing a significantly higher risk of default compared to smaller properties. As a result, community banks with smaller average loan sizes may actually be less risky than their CRE exposure figures would suggest, highlighting the need for a more nuanced evaluation of risk factors.
Analysts have identified several bank stocks with varying levels of exposure to commercial real estate, recommending defensive plays such as NBT Bancorp, Webster Financial, and Valley National Bancorp. While these stocks have faced challenges amid high interest rates and CRE concerns, opportunities for growth and stability exist for institutions with strong management teams and diversified portfolios.
As the commercial real estate loan landscape continues to evolve, investors and financial institutions must adopt a more comprehensive approach to risk assessment. By considering factors beyond just CRE concentrations, such as loan sizes, asset classes, and economic forces, stakeholders can better navigate the challenges posed by maturing loans and changing market dynamics. It is essential to move beyond traditional metrics and embrace a more nuanced understanding of risk in the commercial real estate sector.