2024 – A Growing Commercial Real Estate Crisis by Endurance Advisory Partners

Rising interest rates, structural shifts in remote working, and changes in retail sales and distribution are having a dramatic impact on commercial real estate. While delinquencies, distress, and fire sales haven't been widespread so far, there's a looming concern as a maturity refinancing wall approaches this year. Underwriting and valuations are expected to undergo significant changes in 2024.

Banks, particularly key lenders to commercial real estate and construction projects, are facing challenges as loans from better times come due. "Mini Perms" are transforming into "Perm Perms" as institutional money seeks cover and deal with their own portfolio issues. Commercial Real Estate lenders must actively manage the portfolio to retain capacity for core clients and prospects. Clients, borrowers, employees, and shareholders all want to see thought leadership on CRE.

Among all U.S. banks, CRE accounts for $2.25 trillion in outstanding loans. About a third is held at the largest banks (the 33 banks with >$100 billion in assets), with less than 10% at small banks or those with CRE portfolios less than $300 billion. Over half of CRE exposure is at the 778 medium-sized banks making commercial real estate loans. Most have CRE concentrations of less than 50% of capital.

How does your institution compare?

Out of those 778 banks, 265 (33%) are currently above regulatory guidance of 300% of capital, another 452 (58%) are in the 150-300% range, and only 61 (8%) have less than <150% of capital. Since the end of 2020, over half (137 banks) of the over 300% group (265 banks) experienced growth over 50%. Shrinking bank balance sheets with static CRE portfolios will place additional pressure on regulatory compliance and capital requirements. Almost all those 265 banks will be required to manage down their CRE exposure. The question is not only how and when but also what the broader impact on both markets and valuations ultimately will be.

There is currently a window of opportunity to manage CRE exposure while loans are still performing. As of late 2023, non-accruals and delinquencies were not a problem, averaging only 0.6% of balances. Only a handful of banks have significantly higher delinquencies. Many banks have not acknowledged the maturity wall and growing problems in their CRE portfolio amid hopeful wishes for lower rates to bail them out. With the prospects of rapid shifts downward in CRE market fundamentals, those that proactively manage their portfolio exposure will also proactively manage risk.

How to prepare?

Endurance Advisory can assist banks with their CRE portfolios. Endurance is unique among "financial" consulting competitors given the deep experience of Commercial Real Estate veterans Steve Everbach, who has personally completed over 8 million square feet of transactions and served as a President of Colliers during his career, and Jason Pumpelly, who has advised clients through many industry cycles and built practice groups and direct investments in many CRE asset classes. These leaders are accompanied by a full ensemble of financial institution expertise in our other practice areas.

The Endurance team provides:

• Regulatory Review and Response: We have deep experience in managing regulatory inquiries, responses, and all dimensions of compliance.

• Portfolio Risk Assessments: In-depth portfolio review with credit-by-credit evaluation for each property, sponsor, property management, governance & resilience, strengths/weaknesses, potential changes in risk ratings, and credit-specific recommendations.

• Detailed Market Assessments - Including sub-markets: These are key factors when considering all types of commercial real estate loans.

• Investor Diligence: Portfolio and troubled credit review in support of an investor or potential acquirer.

• Credit Advisory: New credits, restructuring, or refinancing existing debt; recommendations on borrower, property, documentation, and credit structuring.

• Workout/Default Support/Investor Connectivity: Partial support or full outsourcing of problem loans.

• Disposition of Loans: We can direct the loan disposition process as we maintain deep relationships with multiple investment firms that buy performing and non-performing loans and portfolios.

• Customized Planning: We can develop a customized plan for your portfolio that fully addresses safety and sound regulatory concerns. This includes troubled loan remediation and regular internal portfolio reviews.

• Balance Sheet Management and Capital Allocation: Setting targets, achieving goals, and getting square with CRE exposure.

Our deep expertise with regulatory and investor strategies in Commercial Real Estate, Credit Risk, and Credit Workouts is uniquely positioned to assist with strategies, tactics, and resources that can pull your portfolio ahead of these problems other institutions may be reluctant to face until too late.

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