Bank woes in commercial real estate could ease with rate cuts, says Moody's

By Joy Wiltermuth

A resilient economy and increased lending by others could help heal the market

Banks still likely face more fallout from problem commercial real-estate loans, but Federal Reserve rate cuts and increased lending appetite from outside of the banking sector could provide a healing tonic, according to Moody's.

Regional banks and commercial real estate have been in the spotlight since the sudden collapse of Silicon Valley Bank more than a year ago exposed weakness in the banking sector.

The Fed's aggressive rate hikes since 2022 have been a major catalyst of weakness in rate-sensitive parts of the economy, including the estimated $4.7 trillion pile of outstanding commercial real-estate loans, 38% of which reside at U.S. banks, according to Moody's.

The biggest national, regional and community banks each own roughly a 10% to 13% share of the commercial real-estate loan pile, but the biggest banks only have a 4.3% exposure as portion of their overall assets, according to Moody's.

"This is a financing problem," said Stephen Lynch, senior credit officer at Moody's Ratings, in a call with reporters on Wednesday, ahead of the Fed's annual bank stress-test results.

See: Fed says stress tests show banks 'well-positioned' to deal with 'severe' recession

Lending officers at major banks told the Fed in May they had tighter standards in the first quarter for all forms of commercial real-estate loans.

However, insurance companies, private capital and Wall Street banks that pool property loans into bond deals have been ramping up lending in the sector, said Kevin Fagen, Moody's Analytics' director of CRE economics.

"We've clearly hit an inflection point," Fagen said Wednesday.

Another positive for banks is that while the rate of past-due commercial real-estate loans has been ticking higher, it remains manageable, with the rate at the nation's largest banks pegged at 3%.

It took a year or two after the 2007-'08 global financial crisis for loan delinquencies to peak, Fagen said.

It helps that the U.S. economy has so far avoided a recession, despite the Fed's policy rate sitting at is highest level in two decades since last summer. That's helped many tenants manage their rent and lease obligations at commercial properties.

"This is really an interest-rates story," Lynch in Moody's ratings group said.

Stocks SPX DJIA have hit a series of record highs in recent weeks, but the SPDR S&P Bank ETF KBE still was down 2.7% on the year through Wednesday, while the SPDR S&P Regional Banking ETF KRE was 10.1% lower, according to FactSet.

-Joy Wiltermuth

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06-26-24 1825ET

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