- Despite widespread fears, major bank failures from CRE distress remain unlikely. Many institutions are managing challenges better than anticipated.
- Accounting rules and loan classification practices provide banks flexibility, reducing the pressure to write down or sell CRE assets.
- CRE distress levels are lower than expected, with banks seeing limited write-downs and holding off on massive asset sales.
- Regulatory scrutiny is increasing but hasn’t pushed banks to divest or restructure at scale.
According to GlobeSt, banks are often viewed as the linchpin in commercial real estate challenges, given their role as primary holders of loans. However, the reality of their financial stress may not be as dire as predicted.
“Most bankers are tired of talking about it because they think it’s been too overhyped,” says Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence.
Accounting Flexibility
Unlike with bond portfolios, banks holding CRE loans have more leeway in managing their balance sheets. CRE loans are typically categorized as “held for investment,” meaning they are not subject to the same stringent mark-to-market rules as certain bond holdings.
This flexibility allows banks to avoid rapid write-downs, even when valuations drop.
Limited Distress
Distress in CRE loans has been far less severe than anticipated. For instance, portfolio write-downs have been limited to 5–10% of value, and large-scale sell-offs have not materialized.
One factor is the lack of compelling opportunities for would-be distressed investors. Funds raised to capitalize on CRE distress have struggled to find profitable deals.
“The money needs to find a home, and right now it’s not generating income,” Stovall explained.
Regulatory Scrutiny
Though regulators aren’t forcing banks to sell off assets, the increased attention creates an uncomfortable environment. Banks face resource strains as they address regulatory questions, but this oversight has not translated into enforced portfolio reductions.
The number of banks under serious CRE loan pressure has fallen from 577 institutions at the peak of distress to around 446 today. The greatest challenges remain concentrated among large institutions handling high-value CRE loans, such as for office towers.
In Summary
While the challenges facing banks with CRE exposure are real, the pressures have been overstated in many cases. With accounting flexibility, limited distress levels, and regulatory scrutiny that stops short of enforcement, banks are managing their CRE loan portfolios better than expected.
However, ongoing attention from regulators and the broader market will likely keep the issue in focus for the foreseeable future.
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