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“Credit Quality and Loan Volume Decline for Commercial Mortgage REITs”

"Credit Quality and Loan Volume Decline for Commercial Mortgage REITs"

According to a recent report by Fitch Ratings, the credit quality of commercial mortgage REITs (CMREITs) has continued to decline in the first half of 2024. The top 10 CMREITs collectively funded $5.3 billion in originations or existing commitments, which is unchanged from the first half of 2023 and significantly lower than levels seen in both 2021 and 2022. This decrease, combined with ongoing loan write-offs, has resulted in a drop in gross loan balances for these companies to approximately $94 billion – an 11% decrease from peak levels seen in 2022.

As a result of smaller balance sheets, compressed net interest margins and higher provisions, earnings have also declined for CMREITs. In fact, reported pre-tax income for the largest CMREITS was only around $600 million for the trailing twelve months ending June30th – down significantly from $2 billion during the same period last year.

Fitch senior director Bain Rumohr stated that problem loans now make up close to15%of gross loans within this group.” As such,” he added,” we anticipate that these firms will be prioritizing asset resolution efforts overthe near-to-medium term.This may include measures such as foreclosure.”

Overall,the current stateof commercial mortgage REITS suggests significant challenges ahead as they navigate declining credit qualityand reduced loan volume.

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