The threat from a looming wave of maturing commercial real estate loans has been well telegraphed to investors, but it’s possible the metrics they are using to protect themselves from risk are flawed. Many investors have been avoiding bank stocks with high concentrations of commercial real estate (CRE) exposure. However, that metric may miss banks that have riskier loans on their books despite having lower concentrations of CRE. For that reason, investors may want to take a more granular look at the types of loans a bank holds. In doing so, they may find some larger banks are on shakier ground than their CRE concentration suggests. Wall of maturity About 30% of outstanding CRE debt is due to mature between 2024 and 2026, according to data provider Trepp. When this debt matures and the property owners look to refinance, borrowers will face much higher debt payments due to rising interest rates, and economics could become untenable, especially given that the value of many office properties has declined. Owners may decide it’s easier to just to hand back the keys and walk away. The heightened concern about default risk is clearly weighing on bank stocks, which are already fighting the headwinds of higher interest rates. Indeed, the gap between both the KBW Bank Index (up about 4% year to date) and the SPDR S & P Regional Banking ETF (KRE) (down 12% year to date) versus the S & P 500 Index (up nearly 14%) is even wider now than it was during the regional bank crisis in the spring of 2023, UBS analyst Erika Najarian wrote in a research note Thursday. For the moment, the troubled loans are contained. According to CoStar , about 1.23% of all outstanding CRE loans are considered at risk, but the trend may be heading in the wrong direction. At the end of the first quarter, the Federal Deposit Insurance Corp. said the amount of real estate loans past due or in nonaccrual status was $35 billion, up 9% from the fourth quarter of 2023 and 59% higher than the same period a year ago, marking the highest level in 11 years. Investors have been punishing regional bank stocks, especially when the bank’s commercial real estate exposure tops more than 300% of its total equity . That is a benchmark the Federal Reserve
CNBC
The full article is available here. This article was published at CNBC Finance.
Comments are closed for this article!