Delinquency rates for commercial real estate loans are picking up again, and loan growth is slowing, according to S&P Global Market Intelligence.
In a research note released Tuesday, the rating agency reported that the delinquency ratio for U.S. banks’ commercial real estate loans climbed by 16 basis points in the second quarter to 1.4%.
“Overdue commercial real estate loans ticked up further as acute stress in the office sector continues to work its way through bank portfolios,” S&P reported.
At the same time, the agency noted that borrowers across various property types are facing pressure from higher interest costs as their loans mature.
“Problems remain concentrated in offices where vacancy rates have soared and property values have plummeted,” S&P said. “A number of banks with large office portfolios reported lifting loss reserves incrementally from already high levels.”
The outlook for property values is also uncertain, as “transaction volume remains low,” the report said.
Additionally, the annual growth rate for commercial real estate loans at U.S. banks slowed to 2.2% in the second quarter, S&P said — down from from 2.9% in the first quarter, and sharply below the recent peak of 12.1% in the third quarter of 2022.
This slowdown in loan growth “reflects the recent drop in property values along with tougher loan standards,” the agency said.
For the 20 banks with the largest commercial real estate loan portfolios, the value of outstanding loans in the space was down 2.1% year over year in the second quarter, with 12 of the 20 big lenders in the sector reporting declines.
The new data comes on the heels of the latest quarterly results from the big Canadian banks, which saw an increase in provisions as certain banks grapple with rising loan losses and increased headwinds in their U.S. operations.