Slumping Office Property Values Ripple Through US Banks
SLUMPING office property values are rippling through US banks, with smaller lenders in particular ramping up the use of loan modifications in their commercial real estate books.
Loan Modifications on the Rise
The typical bank with less than US$100 billion of assets modified 0.32 per cent of its CRE loans in the first nine months of the year, a Moody’s Ratings report found. That’s a big increase from the first half of 2024, when it was just about 0.1 per cent.
But it’s also a far lower percentage than other kinds of lenders have modified: for medium-sized banks, the share was 1.93 per cent in the first nine months, and for the biggest, it’s 0.79 per cent, the report found.
Regional Banks Most Vulnerable
Much of the focus is on regional banks, which are especially vulnerable because they often took lower down payments than their larger counterparts in the years leading up to the interest-rate hikes that began in 2022.
That means they have less of a buffer before taking losses after office and apartment complex values fell at least 20 per cent since the peak.
Consequences for Lenders
Concerns about future losses have contributed to stock price underperformance for smaller banks, with the KBW Regional Banking Index gaining about 17 per cent this year compared with around 30 per cent for the KBW Nasdaq Global Bank Index.
About US$500 billion of CRE mortgages will mature in the next year “and a significant portion of them are going to go into default,” Florida Atlantic University’s Cole said.
Conclusion
The slumping office property values are having a significant impact on US banks, with smaller lenders being particularly affected. The increased use of loan modifications is a sign of rising distress in CRE credit as a wave of loans come due for refinancing. Regional banks are most vulnerable due to their lower down payments and lack of buffer against losses. The consequences for lenders include stock price underperformance and potential defaults.
FAQs
Q: What is the current state of office property values in the US?
A: Office property values have fallen at least 20 per cent since the peak.
Q: Which lenders are most affected by the decline in office property values?
A: Smaller lenders, particularly regional banks, are most vulnerable due to their lower down payments and lack of buffer against losses.
Q: What is the impact of the decline in office property values on lenders?
A: The increased use of loan modifications is a sign of rising distress in CRE credit as a wave of loans come due for refinancing. Regional banks are most vulnerable to stock price underperformance and potential defaults.
Q: What is the total amount of CRE mortgages that will mature in the next year?
A: About US$500 billion of CRE mortgages will mature in the next year.
