A total 576 U.S. banks exceeded regulatory guidance on CRE loan concentration by the end of Q1–2023, an increase of 30.3 percent compared with a year earlier, according to S&P Global Market Intelligence. Regulators increase their scrutiny of banks that exceed either of two thresholds: 1.) construction loans with at least 100 percent of risk-based capital; or 2.) CRE loans with at least 300 percent of risk-based capital levels and 50 percent growth in CRE over the past 36 months, according to the report.

Fitch Ratings reports that banks are the largest participant in the office loan market with roughly $720 billion in outstanding loans and “[a]ssuming a hypothetical stressed loss rate of 20 [percent] for these loans … this results in about $145 billion of cumulative losses, or 8 [percent] of the sector’s $1.76 trillion of tangible common equity, which banks should be able to absorb over time as they work through their maturities and renewals.” Fortune (citing data from MSCI) reports that the amount of distressed commercial property assets rose 10 percent in Q1–2023, climbing to nearly $64 billion.

On a separate but related note, according to Investor’s Business Daily, Deutsche Bank estimates that a resumption of student loan payments will cut consumer spending by up to $14 billion per month ($305 per borrower). Goldman Sachs estimates (reported in IBD) that personal consumption spending could face an average hit of six-tenths of a percentage point in the last four months of 2023, however, if the U.S. Supreme Court permits the Administration’s student loan forgiveness plan to stand, this drag on spending would be cut in half. If the court strikes down the $400-billion forgiveness program, the U.S. economy could face a close brush with recession, according to the report.

Last Updated on June 23, 2023 by Ramin Seddiq