Local Banks Well-Positioned For Commercial Real Estate Woes

(KNSI) – Commercial real estate woes are beginning to sink their teeth into financial institutions globally, but a look locally shows a much brighter picture.

The Financial Times says the largest banks in the country have only set aside 90 cents for every dollar of loans now at least a month delinquent and collateralized by office real estate, on average. That’s a sharp decline from a year ago.

Many companies sent workers home to do their jobs remotely during the COVID-19 pandemic and they’re still there at least a majority of the week. That has companies rethinking how many offices they need, leading to near-record vacancy levels in many major cities. Banks are beginning to plan for tens of billions of dollars in losses as landlords are caught unable to pay their mortgages and property values fall.

Banks file call reports with the FDIC regularly, which are publicly available. An examination by KNSI News shows little commercial real estate exposure among several prominent local financial institutions. Stearns Bank has over $3 billion in total assets and only $358,000 in delinquent loans among non-owner occupied nonresidential properties. Bremer Bank is at a little over $9 million as part of $16.3 billion in total assets. Falcon National Bank lists no commercial real estate loans behind on payments.

Most commercial real estate exposure is tied up in what are known as regional financial institutions. That is a bit of a misnomer as mergers and consolidation have spread their reach to a national level, but the regional tier is made up of banks like Comerica, Fifth/Third, Huntington, and PNC.

PNC’s non-owner commercial real estate non-performing loans have more than quadrupled since late 2022. The rate has popped from 0.97% of the portfolio to over 4%. In terms of numbers, that equals a jump from about $182 million to $720 million in 12 months. Citi and Goldman Sachs have reported similar issues.

It creates a recipe for sharp losses, which, as we saw in early 2023 with Silicon Valley Bank and others, can turn into a panic in the worst-case scenario. New York Community Bank saw its stock fall by 60% in barely a week at the start of this February after warning on its exposure to CRE loans.

The issue has wide-ranging effects, including government finances. Commercial real estate is an important part of local property tax collection. Crossroads Center Mall and Midtown Square Mall have already been sold this year, accounting for nearly a million square feet of retail space. Those may be the first moves in a great shakeout, not the last. When properties are sold out of need, they rarely are done so for top dollar.

___