Despite a significant downturn in the U.S. office property market, total commercial real estate loans from U.S. banks increased in every region early this year, ballooning to more than $3 trillion.
The Federal Deposit Insurance Corp.’s (FDIC) 2023 Risk Review, conducted this spring and released Monday, also found smaller community banks accounted for 28% ($865 billion) of all new and existing commercial real estate loans in the first quarter.1
That amount almost doubled the proportion of overall U.S. loans (15%) held by community banks, underscoring the degree to which credit risks in the real estate market could impact small-to-midsized lenders in the uncertain economic environment.
Office Property Weakness
The FDIC said four of the five key commercial real estate markets it assesses ended 2022 with “sound fundamentals.” The exception was the office property market.
“The office sector is particularly vulnerable to deterioration,” the FDIC’s report stated. “With a structural decline in office demand and weak rent growth, some borrowers may have difficulty refinancing.”
Unrealized balance sheet losses were at the heart of large regional bank failures that roiled U.S. financial markets this spring. Two of those banks, Silicon Valley Bank and First Republic, had considerable loan exposure to the San Francisco Bay area office market, where office vacancies have surged about four-fold to almost 30% since before the pandemic.2
Vacancies there and elsewhere may not decline soon, real estate research firm Trepp said in a report last week.