Systemic Risk In CRE-Heavy Regional Banks
Latest data and analysis on defaults and delinquencies in Commercial Real Estate
Note: This newsletter contains information for educational purposes only, and the content below should not be considered financial advice to readers. We published a brand new short recommendation for our clients. If you would like to become our client, email laks@unicusresearch.com…
We have been recommending two actionable regional bank shorts. If you are interested in our shorts, email laks@unicusresearch.com.
Commercial Real Estate and Defaults
According to the Mortgage Bankers Association (MBA), delinquency rates for mortgages backed by commercial properties increased during the fourth quarter of 2024.
“The delinquency rate for commercial mortgages increased during the final three months of 2024, with increases across most capital sources and property types. The challenges facing different sectors vary – with office properties perhaps facing the most challenging combination of weaker fundamentals and stubbornly high interest rates. However, despite the current conditions, other property types continue to benefit from a relatively strong economy.”1- Mike Fratantoni, MBA’s SVP and Chief Economist.
The balance of commercial mortgages that are not current increased slightly in the fourth quarter of 2024 and continued with a spike in 1Q 2025.
The share of loans that were delinquent increased for some property types, particularly office, lodging, retail, and multifamily. Delinquencies decreased for industrial properties during the fourth quarter of 2024 and the first quarter of 2025.
1Q 2025 DATA
According to the latest MBA data published today, delinquency rates for mortgages backed by commercial properties increased during the first quarter of 2025.
The delinquency rate for commercial mortgages increased again in the first quarter of 2025, driven by higher delinquencies on lodging and industrial properties and rising delinquencies on GSE and FHA loans.
MBA's CREF Loan Performance survey collected information on commercial and multifamily mortgage portfolios as of December 30, 2024. This quarters’ results build on similar surveys conducted since April 2020. Participants repoion in commercial and multifamily mortgage debt outstanding (MDO) compared to the fourth quarter of 2024 MDO report.
According to Judie Ricks, MBA’s Associate Vice President of Commercial Real Estate Research, MBA is closely watching delinquency trends, as there have been increases in both later-stage and new delinquencies. Economic growth will slow in 2025, which could lead to further increases in mortgage delinquencies through the second half of the year.
FAST FACTS 1Q 2025
The balance of commercial mortgages that are not current increased slightly in the first quarter of 2025.
The share of loans that were delinquent increased for some property types, particularly office and lodging, decreased for industrial and retail properties, and remained roughly constant for multifamily properties overall.
Among capital sources, CMBS loan delinquency rates saw the highest levels.
5.2% of CMBS loan balances were 30 days or more delinquent, down from 5.3% at the end of last quarter.
Non-current rates for other capital sources remained moderate.
1.0% of life company loan balances were delinquent, up from 0.9%.
0.6% of GSE loan balances were delinquent, up from 0.55% the previous quarter.
1.1% of FHA multifamily and health care loan balances were delinquent, up from 1.0% in the prior quarter.
Systemic Risk In CRE Heavy Regional Banks
The commercial real estate (CRE) market is facing a potential crisis due to a surge in delinquencies and a high volume of loan maturities. Specifically, office and multifamily CMBS (commercial mortgage-backed securities) delinquency rates are spiking, with office CMBS delinquencies hitting record highs in the previous months. This situation is exacerbated by high interest rates, rising operational costs, and a structural shift in the workplace that is affecting office properties, particularly in larger cities.
Several banks face significant risk from non-performing commercial real estate (CRE) loans. Banks with high CRE exposure and potential risks include…