According to Fitch Ratings, the largest banks in the United States are well-positioned to handle further declines in loan performance for office and multifamily properties. These two sectors have different trajectories compared to other types of commercial real estate. While office loans are experiencing a long-term structural shift in demand with loss rates yet to peak, multifamily declines appear more cyclical.
Julie Solar, group credit officer at Fitch, explains that while there has been some migration into non-performing loans for both sectors, it has been more muted for multifamily compared to office. However, this upward trend is significant as it marks a change from the historically stable nature of this category. Solar suggests that decreasing inflationary pressures and potential rental rate increases could provide relief for troubled borrowers in the multifamily space.
Despite holding a majority of commercial real estate loan balances, larger banks are better equipped with diversification strategies and resources to withstand expected credit deterioration – particularly when it comes to office loans. As of June 30th , over half of non-performing CRE loans were held by these larger banks; however those with assets between $100 billion and $250 billion actually have a higher percentage of problem loans according to Fitch’s analysis.
The rating agency also notes that vacancy rates are worse for offices than they are for multifamily properties – an estimated 14% versus around 8%. Large regional banks hold both the most problem multi
