The CRE Storm: Proactive Measures Amidst the Growing Crisis by Steve Everbach, Joe Siegel and Steven Patrick

Rising interest rates and the structural shift towards remote work are significantly impacting commercial real estate. While delinquencies, distress, and fire sales haven't been common to date, this may soon change. Banks play a crucial role in commercial real estate projects, and many loans made in better times are now maturing in challenging times. It's essential for CRE lenders to actively manage their portfolios to avoid falling behind.

Putting it into perspective, among all U.S. banks, CRE accounts for $2.25 trillion in outstanding loans as of 2Q23. About a third is held by the largest banks (the 33 banks with >$100B in assets), with less than 10% held by small banks or those with CRE portfolios less than $300 billion. Consequently, over half of CRE exposure is at the 778 medium-sized banks making commercial real estate loans. CRE concentrations are not currently problematic at the largest banks. Only one (Flagstar) has a high concentration (478% of capital), which will decrease when its Signature portfolio is sold. The next highest is M&T (173% of capital), while everyone else is below 150% of capital, with most having CRE concentrations of less than 50% of capital.

How does your institution compare?

Out of those 778 banks, 265 (33%) currently exceed the 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. Moreover, since the end of 2020, over half (137 banks) of the over 300% group (265 banks) have also experienced growth of over 50%. Shrinking bank balance sheets with static CRE portfolios may put additional pressure on regulatory compliance. Upcoming maturities and cap expirations are the trigger driving downgrades and credit losses. Almost all those 265 banks will be required to manage down their CRE exposure. The question is how and when?

On average, bank CRE lending in aggregate grew 20.5% over the past 2.5 years – 8% per year – reasonable growth. Among the 265 banks with the highest concentrations, growth was 67% – 23% per year – a concerning trend.

There is currently a window of opportunity to manage down CRE exposure while loans are still performing. As of 6/30/23, non-accruals and delinquencies were not a problem – averaging only 0.6% of balances. Only a handful of banks have significantly higher delinquencies, so most banks do not currently acknowledge problems in their CRE portfolio. However, with market fundamentals deteriorating, those that proactively reduce exposure now will cut their losses.

Our team at Endurance Advisory can provide high value added assistance to banks with their CRE portfolios. We work with management and your legal team in providing the following:

• Regulatory Review and Response: Our team has deep experience in managing regulatory inquiries and compliance.

• Portfolio Risk Assessments: We provide confidential, in-depth portfolio review and delinquency forecast, with credit-by-credit evaluations and potential marks for each property, and evaluate the sponsor, property management, governance & resilience, and assess strengths/weaknesses, potential changes in risk ratings, and make credit-specific recommendations.

• Detailed Market Assessments: Including sub-markets – we can provide guidance on key factors when considering all types of commercial real estate loans.

• Investor Diligence: We work with investors or acquirors on portfolio and troubled credit reviews.

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

• Workout/Default Support/Investor Connectivity: We can provide partial support or full outsource of management of problem loans.

• Disposition of CRE Loans: We have extensive experience directing loan disposition processes given our deep relationships with multiple investment firms that buy performing and non-performing loans and portfolios.

• Customized Planning: We work with your team to develop a customized plan for your portfolio that fully addresses safety and sound regulatory concerns. This includes troubled loan remediation, identifying capital needs and establishing regular internal portfolio reviews.

• Balance Sheet Management and Capital Allocation: We can make recommendations on targets, steps to achieve goals, and getting square with CRE exposure limits.

Our customized assessments provide each client (banks, funds and investors) with a playbook tailored to their portfolio and market conditions. Our services can be tailored to clients of all sizes, ranging from $50 million to $100 billion. We look forward to visiting with you.

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