In the second quarter, there was an increase in net charge-offs and delinquency rates for commercial real estate (CRE) loans held by banks, as reported by Trepp. This rise in distress was seen across all major types of commercial properties, leading to heightened lender concern about risk and a decrease in origination volume.
When a bank holds a troubled CRE loan on its balance sheet, it will absorb expected future losses through “charge-offs.” These are not included in delinquency figures but maintain consistency when accounting for potential risks. As such, once charged-off loans are removed from both the numerator and denominator of the delinquency rate.
The office sector saw significant growth in net charge-offs over consecutive quarters: $49 million (Q4 2022), $149 million (Q1 2023), and $459 million (Q2 2023). The lodging and multifamily sectors also experienced an increase in charge-off totals recently.
Despite these increases being excluded from the delinquency rate calculation, overall CRE mortgage delinquencies continued their upward trend since Q4 2022. In Q2 alone, total delinquencies rose by 12 basis points to reach 1.15%, while serious or non-current loan rates increased by17 bps to reach .95%.
The office sector had one of the most dramatic rises with its Q1 rate jumping from just under three percent to almost five percent due to steady increases over recent years; however lodging has shown improvement since COVID’s severe impact with its latest numbers decreasing slightly at six point three percent after reaching seven point nine earlier this year.
