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Commercial Real Estate Decline and Delinquencies Promise More Bank Failures

The commercial real estate (CRE) loan delinquency rate, which has been rising throughout 2023, jumped more sharply in the fourth quarter of the year; and according to the Financial Times Feb. 20 CRE loan losses began to exceed loan loss reserves even at the biggest U.S.-based banks. The “regional” and mid-sized U.S. banks have a larger share of CRE loans in their total assets, however, and that is where bank failures are likely to result.

At the end of the third quarter 2023, office building loans delinquent more than 30 days were 5.1% of all such loans; by the end of the fourth quarter they were 6.5%. And some office building loans have blown out spectacularly, with the downtown buildings such as in San Francisco, Baltimore and Philadelphia being sold in foreclosure for 25% or less of their previous sale price. Therefore, the loan losses are greater than the rising delinquency share would indicate, and the “Big Six” Wall Street banks’ loan-loss reserves, which at the start of 2023 were $1.60 per dollar of loans delinquent over 30 days, are now just 90 cents, according to the FDIC. Those delinquent and distressed CRE loans went from $11.2 billion to $24.3 billion during 2023.

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