The largest U.S. banks remain in the best position to weather further loan performance declines for office and multifamily, two commercial real estate sectors that Fitch Ratings cites as having different trajectories compared to other property types. Although the drop in office loan performance represents a long-term structural shift in demand with loss rates yet to peak, multifamily declines appear more cyclical, according to group credit officer Julie Solar. Distress in both sectors has yet to play out, though.
“Migration into non-performing loans has been more muted for multifamily in comparison to office, but the upward trend represents a change for a category that had proven extremely stable over time,” said Solar. “Decreasing inflationary pressures, particularly insurance costs, and rental rate increases would provide relief to some troubled multifamily borrowers, while potential rate cuts would be especially beneficial in the rent-controlled space.”
Despite holding a majority of CRE loan balances, larger banks are much more diversified and better positioned to withstand expected credit deterioration, particularly in office loans. While the largest banks account for over half of non-performing CRE loans as of June 30, those banks with assets between $100 billion and $250 billion have a higher percentage of problem loans, according to Fitch.
The rating agency noted that office vacancies are also worse than multifamily, with an estimated 14% of office real estate vacant versus around 8% for multifamily. Large regional banks have both the most problem multifamily loans and the highest percentage of multifamily NPLs at 1.68%
Read More: Fitch: Distress in Office, Multifamily Loans Still Playing Out
