In the second quarter, Trepp reported an increase in net charge-offs and delinquency rates for bank-held commercial real estate (CRE) loans. All major commercial property types showed greater distress, leading to increased lender concern about risk across multiple regions. This has resulted in a significant slowdown in origination volume compared to pre-COVID levels.
When a CRE loan on a bank’s balance sheet shows signs of serious trouble, the expected future losses are absorbed by charging off all or part of the loan. These charge-offs are not included in later delinquency figures for consistency purposes. The office sector saw its net charge-off amount more than triple consecutively over two quarters.
Despite this uptick in charge-offs across most property sectors, CRE mortgage delinquencies continued their upward trend from Q4 2022 onwards. The total delinquency rate rose by 12 basis points from Q1 to Q2 while the serious delinquency rate increased by 17 bps during this period.
The office sector experienced a dramatic rise in its delinquency rate during Q2 after showing steady increases over recent years. On the other hand, although lodging had been heavily impacted by COVID and had shown high levels of non-current loans since 2020, it has improved with its rate decreasing from Q1 to Q2.
