Bank Exposure to Commercial Real Estate
INSIGHTi
Bank Exposure to Commercial Real Estate
November 16, 2023
The economic turmoil resulting from the pandemic negatively affected commercial real estate (CRE),
particularly by leading to a sharp, albeit temporary, increase in delinquencies among commercial
mortgage-backed securities. As the economy recovers from the pandemic, some CRE owners with
mortgages outstanding are continuing to face pressure from a decline in lease payments. Missed payments
potentially jeopardize owners’ ability to repay their lenders, many of which are banks. According to the
Federal Deposit Insurance Corporation (FDIC), “more than 98 percent of banks engage in CRE lending
and CRE loans are the largest loan portfolio type for nearly half of all banks.” This Insight examines the
extent to which banks are exposed to CRE risk and explores issues Congress may find relevant.
Overview of CRE Market Stress
The CRE market is large and complex. Most of the properties are owned or leased by private companies,
so valuing the market is difficult. Banks are the largest lender of CRE mortgages and hold around $3
trillion in CRE debt on their balance sheets. Nonbank financial institutions also play a significant role.
CRE comprises many subsectors, including office and industrial space, retail storefronts, apartments,
hotels, health care facilities, and other specialty properties such as sports venues, storage units, and data
centers, but stress is concentrated in office and retail space.
CRE mortgages are financed on shorter terms than residential mortgages, often with balloon payments
due at maturity, often two to five years. Trepp, an industry analysis firm, estimates that $448 billion in
CRE loans are maturing in 2023, with about $270 billion of that coming from bank loans. In the retail
subsector, leases on many retail spaces tend to last between three and five years. This means that many of
the tenants of properties with mortgages coming due are deciding whether or not to renew their leases. In
the office subsector, due to the convergence of work-from-home policies and other economic pressures,
many companies that rent space from CRE owners are not renewing their leases, and some are breaking
their leases or trying to renegotiate terms. This is evidenced by higher office vacancy rates, which hit all-
time highs earlier this year.
A loss of rental income will lead to higher default rates among CRE owners. This is compounded by the
coinciding maturities of many CRE mortgages, which will accelerate defaults if rental income cannot
sufficiently offset the balloon payment obligations or if alternative financing cannot be procured.
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Bank Exposure to CRE
Banks are exposed to CRE in a few ways. The most direct way is by issuing and holding CRE loans on
their books. These loans can be issued to commercial property owners or to developers. A more indirect
way banks are exposed is through holding commercial mortgage-backed securities on their books as
investments. (This is not the focus of this Insight but is an important source of liquidity in mortgage
markets.) Banks hold $1.8 trillion of non-farm, non-residential CRE loans on their books. Delinquency
rates on CRE loans peaked at 9% in 2010 in the aftermath of the financial crisis and fell to a recent low of
0.58% in 2018 before spiking briefly during the pandemic. While delinquency rates have risen again, they
are still lower than pandemic levels. However, charge-off rates have already begun to exceed pandemic
levels, suggesting that banks are writing down the values of their CRE portfolios (see Figure 1).
Figure 1. Charge-Off Rates on CRE Loans
All Commercial Banks
Source: Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/CORCREXFACBS.
Note: Seasonally adjusted data.
According to FDIC data, charge-offs are highest among the largest banks (see Figure 2). Because the
largest banks generally tend to make larger loans, this could mean that vacancies among large office and
retail spaces are driving this trend. Alternatively, it could mean the large banks have just been quicker to
write down their CRE loans.
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Figure 2. Charge-Off Rates on CRE Loans
By Asset Size of Bank
Source: FDIC Quarterly Banking Profile, Q2 2023, https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2023jun/
qbp.pdf#page=11.
Bank Supervision and Regulation of CRE Risk
Congress has shown considerable interest in bank supervision in the wake of three large bank failures in
2023. One area of focus of recent oversight has been on banks’ ability to manage unrealized losses and
hold appropriate amounts of capital to offset the associated risks of assets held in their portfolios. To that
end, capital rules assess risk weights to CRE exposures. Other bank regulatory considerations related to
CRE include the following:
• In June 2023, the federal banking agencies issued guidance on “Prudent Commercial
Real Estate Loan Accommodations and Workouts,” in which they issued a formal policy
statement to provide a framework for how banks should accommodate loans that are not
being repaid.
• In accordance with 2007 regulatory guidance, supervisors place enhanced scrutiny on
banks that hold more than one of the following measures: “construction loans surpassing
100% of risk-based capital” or total “CRE loans above 300% of risk-based capital” and
“50% growth in CRE over the last 36 months.” CRS calculated that as of June 2023, 483
banks held construction loans exceeding 100% of Tier 1 capital. These banks represent
relatively small institutions comprising $631 billion in assets. However, 1,020 banks held
CRE loans exceeding 300% of Tier 1 while reporting growth exceeding 50% over the
past three years, representing $2 trillion in banking assets, including 35 banks between
$10 billion and $100 billion in assets.
• In July 2023, the banking agencies announced a proposal to modify capital rules for the
largest banks—those exceeding $100 billion in assets. These banks hold about $1.5
trillion in CRE exposure, and none meets either of the above supervisory thresholds.
According to the proposed rule, “the agencies estimate that the proposal would slightly
decrease marginal risk-weighted assets attributable to retail and commercial real estate
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• exposures.” In other words, if the rule were finalized, large banks would hold less capital
against CRE exposures.
Author Information
Andrew P. Scott
Analyst in Financial Economics
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Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
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information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
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