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What's The Buzz – Commercial Real Estate and Banks

What's The Buzz – Commercial Real Estate and Banks

February 20, 2024

Let us begin with the following note: This publication is not designed nor meant to be an in-depth review or analysis of the banking system, regional banks, or the commercial real estate market generally. We have previously written on the pressure building in office real estate from higher interest rates and the rise of Work From Home. This is designed to provide a macro understanding of the issues currently facing the banking system.

As has been stated in many different forums, the regional banking system is, once again, feeling pressure and, once again, it is focused on the regional banks. To show the impact of the regional bank pressure, the following is a chart of the KBW Regional Bank Index versus what we call the CCAR Banks (banks subject to qualitative assessment as part of the Federal Reserve’s Comprehensive Capital Analysis and Review “CCAR”, with the exception of the two banks focused on asset servicing, (BNY Mellon and State Street Corp).

Source: BCIS/Bloomberg Finance LP

While the regional bank pressure in March 2023 was due to the impact of interest rate increases in the banks’ securities (and loan) portfolio and the resultant depositor flight, this year’s flavor of pressure is due to the regional bank exposure to commercial real estate (“CRE”).

As the following chart shows, regional banks/smaller banks hold the lion’s share of bank exposure to CRE.

CRE is a higher margin business and allowed many of the regional banks to add yield (and loan volume) when rates were super low. There is, of course, no free lunch in the world (or at least the world we are involved in – financial markets). In the most recent Green Street Commercial Property Price Index release, the following data was included:

Source: Greenstreet (

The above data is not entirely consistent with the MSCI USA IMI Liquid Real Estate Index, which is down nearly 4 percent during 2024 after increasing approximately 7.5 percent during 2023.

Source: BCIS/Bloomberg Finance LP

The difference in the two indices (calculation aside) serves to tell investors that with largely illiquid asset classes, one must be careful about interpreting the data literally and instead focus on the directionality of the indices. Moreover, real estate differs via asset type, region, and characteristics. National indices can be misleading – again, the directionality is the key more so than the calculated changes.

According to MSCI Real Assets (emphasis ours), the pool of distressed U.S. commercial properties grew to USD 85.8 billion by the end of 2023, led by distressed office assets, as weaker prices and higher lending rates challenged the market. The balance of distress, which encompasses financially troubled assets and assets taken back by lenders, increased throughout the year. Still, the pace of additional trouble slowed in the fourth quarter, when new distress outpaced workouts by USD 4.2 billion, down from USD 9.0 billion in the third quarter. At the end of 2023, offices constituted 41% of the value of cumulative distress. However, in terms of the new trouble added in the fourth quarter alone, the office market’s share fell to 39% from more than 80% in the second and third quarters of the year. Distress in the retail market, on the other hand, swelled. Resolutions to a distressed situation had exceeded new distress for retail earlier in the year, but in the fourth quarter this trend was reversed. Potential distress, which may precede full-blown financial trouble, totaled USD 234.6 billion at year-end. The multifamily market constituted the largest pool of potentially distressed assets, with a value of USD 67.3 billion, ahead of office with USD 54.7 billion. (US Commercial-Property Distress Swelled in 2023, Alexis Maltin, MSCI Real Assets, January 30, 2024)

Source: MSCI Real Assets

The impact of the weakness in CRE on the banking system can also be shown in a study by the National Bureau of Economic Research which stated:

Using the loan-level data on CRE loans we find that after recent declines in property values following higher interest rates and adoption of hybrid working patterns about 14% of all loans and 44% of office loans appear to be in a “negative equity” where their current property values are less than the outstanding loan balances. Additionally, around one-third of all loans and the majority of office loans may encounter substantial cash flow problems and refinancing challenges, reflecting in part more than doubling of cost of debt following monetary tightening and substantial increase in credit spreads. This evidence suggests that if interest rates remain elevated and property values do not recover, default rates could potentially reach levels comparable to or even surpassing those seen during the Great Recession.  We find that a 10% (20%) default rate on CRE loans – a range close to what one saw in the Great Recession on the lower end -- would result in about $80 ($160) billion of additional bank losses.

While the above losses due to CRE distress are an order of magnitude smaller than more than $2 trillion decline in bank asset values associated with higher interest rates, they would increase the insolvency risk on a substantial set of US banks. We find that additional 231 (482) banks with aggregate assets of $1 trillion ($1.4 trillion) would have their marked to market value of assets below the face value of all their non-equity liabilities. Our analysis demonstrates that distress in the commercial real estate sector could lead to the inclusion of dozens to over three hundred predominantly smaller regional banks within the cohort of institutions vulnerable to insolvency arising from the uninsured depositor runs.

Importantly, we are not saying, nor do we necessarily believe, that there will be depositor runs on banks as we witnessed in a small subset of examples in early 2023, but rather we are highlighting the potential impact continued weakness could have within the banking system.  This would be extremely prevalent in smaller banks, as shown above in small bank holdings of CRE as a percentage of all bank holdings of CRE.

The drop in property prices, and hence the value of the collateral for the CRE loans, serves to increase the uncertainty surrounding the ultimate repayment of the loans – as does the financial stress on borrowers who are now paying higher rates if they borrowed in a floating rate manner.  Should the borrower become stressed and the value of the property be worth less than the value of the loan, you might get what we called in the financial crisis -“jingle mail”, or the keys to the property turned over to the lender.  As the probability of this increases, no matter how slight, additional loan provisions have to be set aside which would otherwise have flowed to earnings. 

This uncertainty surrounding the ultimate repayment of debt is expected to be exacerbated over the next two years due to the amount of mortgages coming due – the “debt wall”.  As the following chart by Cred IQ shows, there is over $1.2 trillion of commercial mortgages expected to mature.  If values are lower and the cost of debt is higher, the more jingle mail can be expected.  As this flows through the system in real estate owned, loss provisions, and distressed sales, banks will see their earnings and capital strained.  This is one of the reasons that additional capital requirements might be expected for banks.

A recent example of this was New York Community Bank (NYSE: NYCB) which recorded a $552 million provision for loan losses, up from $62 million the previous quarter.  This increase in provisions swung the bank to a loss and increased the scrutiny of their CRE portfolio as well as the entire sector’s. The impact on their share price was immediate and severe.


Source: BCIS / Bloomberg Finance LP

The Bank’s stock fell approximately 37 percent on the day of their earnings release and the regional bank index dropped approximately six percent. Again, and importantly, we are not saying the NYCB is either insolvent or facing insolvency, we are attempting to show the potential impact of additional CRE provisioning on the market price (and hence value) of bank shares and their credit ratings, NYCB was cut to “junk”.  Part of the issues facing NYCB came about as a result of its merger with Flagstar bank and the addition of a portfolio of assets and liabilities from last year’s failed Signature Bank.  This increase brought its assets above $100 billion and into a new regulatory framework.

Issues with CRE exposure are not, of course, limited to regional banks or, for that matter, domestic banks.

  • Japanese lender Aozora Bank saw its stock plummet after it said it would post its first loss in 15 years because of bad loans tied to US property. In two days, it lost 33 percent of its value. Like NYCB, it surprised the market by setting aside 32.4 billion yen to deal with bad loans, leading to an annual loss of 28 billion yen, compared to estimates of a 24 billion yen profit.
  • Deutsche Pfandbriefbank AG (PBB), a leading European specialist bank for commercial real estate finance, recently put out a statement saying that it further increased its risk provisioning in the fourth quarter 2023, amounting to expected -€210 million to -€215 million. It ended its release stating, “Despite these expenses, PBB remains profitable thanks to its financial strength – even in the greatest real estate crisis since the financial crisis.”
  • Swiss bank Julius Baer group invested approximately $700 million in Austria’s Signa Holdings, a large privately held real estate conglomerate (now in bankruptcy). While it put aside $81 million for eventual losses in November 2023, it ended up writing off the entire amount.  In this instance we see that losses tied to real estate do not have to be direct loans but can take the form of private debt to real estate funds and owners.


It’s hard to get real time data on CRE loan performance since banks issue almost half of these loans and aren’t always willing to disclose performance until it is required or they feel it necessary, but banks have recently been tightening the spigot on new office CRE loans. To get a better update on CRE performance we can look at a smaller section of the market called commercial mortgage-backed securities (CMBS), which offers monthly data instead of quarterly filings by the public banks.

This is another area where the debt wall is a cause of concern for the market. Looking at 2023 data provided by CRED iQ, only 26% of office CMBS loans were paid off in full. Borrowers struggled to sell properties in 2023 as buyers are waiting on the sideline for prices to fall further or for ideal properties to hit the market.

In January 2024 data provided by CRED iQ, the CRE office sector is showing the most distress since October 2023 in terms of loans being delinquent or sent to special servicing. Multifamily saw a decrease in distress in the January data, but pressure is still high in that market, second only to the office market.

Source: CRED iQ

CRED iQ’s overall distress rate as displayed in the figure above aggregates the two indicators of distress – delinquency rate and special servicing rate – into an overall distressed rate. This includes any loan with a payment status of 30+ days or worse, any loan actively with the special servicer, and includes non-performing and performing loans that have failed to pay off at maturity.

The biggest takeaway from the January data released by CRED iQ is the amount of office CRE loans 30+ days delinquent or in special servicing is triple what it was a year ago and expected to rise. Even more concerning is that 200 distressed office loans in special servicing were recently reappraised at an average of 40% less than their last appraised value. Higher office vacancies and weak cash flow is showing up in these depressed property values. A silver lining according to industry professionals is that loans sent to special servicing have been going right back out into the market, in contrast to the 2008 financial crisis when they just stayed there.


Are bank investors overreacting to the CRE boogeyman. Are quality regional bank stocks being thrown out with the bathwater? The answer is likely somewhere in the middle. Our view is that the stress banks and property developers are experiencing is in its early stages. Many large real estate investors are raising funds for distressed real estate investing and will likely deploy capital into deals trading below their replacement value as property values continue to fall and going in cap rates increase (increasing investor IRR). Smaller banks will continue to pare back their exposure and get smaller, which could have a meaningful downside effect on the communities they serve. It does appear, however, that private credit providers are filling part of the liquidity void by providing fresh capital, helping maintain financial conditions and increase price discovery.

Borrowers can only extend their maturing loans or “kick the can down the road” only for so long. The office CRE market is in the middle of areset and the winners may well be banks that have managed their CRE book well including not over-concentrating in office CRE and opportunistic investors who grab quality assets at the bottom but as we are early in the downcycle there is no telling when that bottom will be.

We have also been paying attention to multifamily/apartments in regions where there has been significant supply and the sector is now in a supply/demand imbalance, such as areas within the sun belt. One needs look no further than the many syndicators that began buying in a low rate environment and are now financially stressed.

Finally, it is important to realize that while we often see real estate presented on a national trend basis, the asset class prices locally and there can be significant differences in the characteristics of the loans (security, loan-to-value, debt characteristics…).  Urban office will have different characteristics than suburban office or medical office.  Multifamily in Houston will have different characteristics than multifamily in Boston.  As a result, banks will not all be affected by their exposure to CRE to the same degree.  Diligence is required when investing in this space as it is when investing in any space.


KBW Bank Index. KBW Bank Index. This is a modified cap-weighted index consisting of 24 exchange-listed National Market System stocks, representing national money center banks and leading regional institutions.

KBW Regional Bank Index. The KBW Regional Banking Index is a modified-capitalization-weighted index, created by Keefe, Bruyette & Woods, designed to effectively represent the performance of the broad and diverse U.S. regional banking industry.

CCAR Bank Index.  The CCAR bank index is a BCIS created index which is market capitalization weighted (weightings as of 2/12/2024) comprised of JPMorgan, Bank of America, Wells Fargo, Citigroup, PNC Financial Services Group, Truist Financial Corp, and US Bancorp.

Green Street’s Commercial Property Price Index® is a time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted.

The MSCI USA IMI Liquid Real Estate Index attempts to capture the best of both direct and listed real estate approaches: an investable index with a risk and return profile of direct (private) real estate, and the liquidity of listed (public) real estate.


[1] US Commercial-Property Distress Swelled in 2023, Alexis Maltin, MSCI Real Assets, January 30, 2024

[1] Monetary Tightening and U.S. Bank Fragility in 2023:­ Mark-to-Market Losses and Uninsured Depositor Runs? /­Erica Xuewei Jiang, Gregor Matvos, Tomasz Piskorski, Amit Seru.‑  National Bureau of Economic Research­ December 2023. Pp. 2-4


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