(Bloomberg) — The decline in the value of office properties is rippling across U.S. banks, with smaller lenders in particular ramping up the use of loan modifications on their commercial real estate books.
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A Moody’s report found that the typical bank with less than $100 billion in assets modified 0.32% of its CRE loans in the first nine months of the year. This is a significant increase from the first half of 2024, when it was only about 0.1%.
But it’s also a much smaller proportion than what other types of lenders adjusted: for mid-sized banks, the share was 1.93% in the first nine months, and for the largest, it was 0.79%, the report found. The difference may not be because smaller lenders made better loans, but rather because they were slower to respond to falling commercial real estate prices.
Modifications are typically requested by distressed landlords looking to defer payments and obtain short-term loan extensions. Their increasing use is the latest sign of growing distress in CRE credit as a wave of loans come due for refinancing.
Much of the focus is on regional banks, which are considered particularly vulnerable because they often received lower down payments than their larger counterparts in the years before interest rate hikes began in 2022. This means they have less in reserve before… Take losses fell after the value of office and apartment complexes fell by at least 20% since the peak.
Meanwhile, large U.S. banks, which are subject to stress tests and other forms of intense regulatory scrutiny, have so far set aside more money to cover bad loans than smaller banks, according to Rebel Cole, a finance professor at the University of Florida. Atlantic University, which also advises Oaktree Capital Management LP.
Concerns about future losses have contributed to weak stock price performance for smaller banks, with the KBW Regional Banking Index up about 17% this year compared with about 30% for the KBW Nasdaq Global Bank Index.
About $500 billion in mortgage mortgages will mature next year, “and a significant portion of them will default,” said Cole of Florida Atlantic University. “There will be sales on the cheap. They will put more downward pressure on commercial property prices across the board.
Federal Deposit Insurance Corp. Chairman Martin Gruenberg warned Thursday that vulnerabilities in some of the banking system’s loan portfolios, including office and multifamily, still warrant close monitoring.
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