Commercial Real Estate is in serious trouble

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Declining credit quality metrics in Commercial real estate lending pushed several banks to reduce their exposures to the sector by offloading loans related to the asset class, particularly office loans, in the second quarter.

US banks’ commercial real estate loan portfolios showed signs of increasing stress

commercial real estate bubble cre bubble delinquencies trend

During the second quarter, the net charge-off rate for commercial real estate loans experienced a modest but significant 18 basis-point uptick, landing at 0.26%. This shift marked a notable 26 basis-point rise compared to the same period in the previous year, signifying the highest charge-off rate observed since the fourth quarter of 2020.

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The surge in commercial real estate loan delinquencies mirrored the struggles faced by borrowers in servicing their increasingly costly debt obligations.

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Further Escalation of Distress in the US Real Estate Sector

Commercial Real Estate Investors Struggle to Navigate Harsh Financing Challenges

In a striking year-over-year surge, net charge-offs for total commercial real estate (CRE) loans skyrocketed by an astounding 4,138.6%, reaching $1.17 billion during the second quarter, as per data from S&P Global Market Intelligence. This substantial increase sharply contrasts with the modest $27.7 million recorded during the second quarter of 2022.

Residential Mortgage Loans Surge in US Life Insurer Portfolios

Residential mortgage loans have significantly grown as a component of the investment portfolio of US life insurers in the first half of 2023. According to an in-depth analysis of loan-level disclosures within quarterly statutory filings, these loans constituted 36.8% of the $39.39 billion aggregate cost of mortgage loans acquired by insurers during this period, marking a notable increase from 23.4% in the corresponding timeframe of the previous year and 25.8% for the entirety of 2022.

commercial real estate bubble residential loan

This transformation in investment strategy is noteworthy, considering that just as recently as 2018, residential loans represented less than 10% of the total dollar value of mortgages acquired by the industry. The surge in their prominence reflects a confluence of factors, including evolving market conditions, changing investor appetites, and the enhanced capabilities of life insurers in navigating this specific arena. The ongoing transactions related to the Teachers Insurance & Annuity Association of America’s (TIAA) divestiture of a majority stake in its former banking arm are further amplifying this trend in 2023.

The absolute volume of residential mortgages procured in the initial half of the year saw a modest decline of 22.7%. This occurred in a period when acquisitions of other mortgage types experienced a more substantial drop of 59.5%. It’s important to note that TIAA’s addition of $2.59 billion worth of residential mortgages from its former bank on April 10 played a significant role in shaping these statistics. Without this activity, residential mortgage acquisitions would have seen a more closely aligned reduction of 36.5%, which aligns with the 37.2% decrease observed in the dollar value of one- to four-family mortgage originations, as reported by the Mortgage Bankers Association.

commercial real estate bubble US life insurer mortgage

As TIAA continued to bolster its residential mortgage holdings with an additional $2.3 billion acquisition from the bank on July 14, now rebranded as EverBank NA following the completion of its sale on August 1, it is expected that residential mortgages will continue to represent a substantial share of the total mortgage acquisitions made by US life insurers in the third quarter. Furthermore, comparisons in the coming quarters are anticipated to show less daunting year-over-year declines in the acquisition of other loan types, as the industry adjusts to this evolving investment landscape.

Shift in Commercial Real Estate Investments: Multifamily Properties Take Center Stage

Multifamily properties have emerged as the key focus area for US life insurers in their commercial mortgage investments. In the first half of 2023, out of the total $23.14 billion invested in uninsured commercial mortgages, a significant 32.6% were secured by multifamily properties, while 10.8% were allocated to office spaces. This shift in focus is noteworthy, particularly when considering that offices, once the primary sector of interest for insurers in the early- to mid-2010s, now face challenges stemming from declining demand by employers.

commercial real estate bubble Multifamily

Discounts to Net Asset Value for US Equity REITs Surge in August

Publicly traded US equity real estate investment trusts (REITs) exhibited a median discount of 19.5% to their consensus net asset value (NAV) per-share estimates as of August 31st. This represents an increase from the previous month’s median discount of 15.9%, as reported by S&P Global Market Intelligence data.

commercial real estate bubble median discount

Notably, office-focused REITs saw the most significant median discount to NAV at 35.4%, closely trailed by hotel-oriented REITs, which traded at a median discount of 33.8%. Regional mall REITs also featured on this list, with a median discount to NAV of 27.8%.

In addition to office and hotel REITs, other sectors that traded at a median discount to NAV exceeding the overall average included diversified REITs, communications REITs, and timber REITs.

Of the top 10 REITs with the most substantial discounts, six were concentrated on office properties, while the remaining four REITs represented diverse sectors, including industrial, different retail, residential, and hotel real estate.

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Top Commercial Real Estate Lenders among US Banks

Top Commercial Real Estate Lender in US Bank


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