Bank CRE Loans Hit All-Time Highs

March 2, 2024

My first-hand experience with banks has me concluding that they are virtually shut down for new commercial real estate (CRE) loans, especially construction. Banks are not competing in a dogfight for deals. They can pick and choose what they want to pursue. They get to lend on the best deals with the best sponsors. But the data shows that construction and CRE loans grew quarter over quarter to ALL-TIME HIGHS! How can this be when the banks are locked up?

Non Owner CRE Loans: All US Banks

Non Owner CRE Loans

Source: bankregdata.com, 2023 Q4 Asset Review

The two most plausible reasons I can think of are:

1) Banks are not getting their existing real estate loans paid off as expected. CRE sales have dropped 75% from 2022. No sale - no debt payoffs. Even if the loan term is expiring, many borrowers cannot sell and cannot contribute the equity to either right size the loan or take it to another bank. This means either the lender forecloses or extends and pretends there is hope for a payoff in the future.

2) CRE loans have long durations. Construction on a sizable multifamily project could take two or three years to complete. It is possible that a $100 million MF loan closed in December 2021 and is now making the final construction loan draw as they get their certificate of occupancy. That's over two years from the loan closing. After construction, it is still obligated to fund interest and the operating deficit until it is leased up. The loan amount increases every month.

This is not the data I expected, but it makes sense considering how few CRE sales are occurring and how robust the CRE market was in 2021-2022, which led to a lot of debt.

What does this mean for borrowers of CRE? Lending is going to stay tight for a while. When it starts to drop, it will be steep. Banks can't add CRE loans to the books quickly. It takes time to build up a loan portfolio. At some point, the pendulum will swing back in our favor, and it will be dramatic.