Determinants of Recent CRE Distress: Implications for the Banking Sector

David Glancy and Robert Kurtzman

No 2024-072, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Rising interest rates and structural shifts in the demand for space have strained CRE markets and prompted concern about contagion to the largest CRE debt holder: banks. We use confidential loan-level data on bank CRE portfolios to examine banks' exposure to at-risk CRE loans. We investigate (1) what loan characteristics are associated with delinquency and (2) to what extent the portfolio composition of major CRE lenders determines their exposure to losses. Higher LTVs, larger property sizes, and greater local remote work tendencies are all associated with increased delinquency risk, particularly for office loans. We use several machine learning algorithms to demonstrate that variation in exposure to these risk factors can account for most of the performance disparity across different types of CRE lenders. The headline result is that small banks' comparatively modest delinquency rates mostly reflect observable portfolio characteristics---predominantly their low holdings of large-sized office loans---rather than unobserved factors like extension or modification tendencies.

Keywords: Commercial real estate; Banks; CMBS (search for similar items in EconPapers)
JEL-codes: G21 G23 R33 (search for similar items in EconPapers)
Pages: 43 p.
Date: 2024-08-29
New Economics Papers: this item is included in nep-big and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-72

DOI: 10.17016/FEDS.2024.072

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