US banks’ CRE lending hits record in H1 despite sector stress

Smaller lenders drive $32 billion increase ahead of new regional losses

US banks’ commercial real estate lending reached a record high midway through this year, just one quarter before idiosyncratic losses at some regional lenders reignited concerns about underwriting quality.

Risk Quantum’s analysis of 981 US banks shows they held a combined $2.08 trillion in CRE loans at end-June – a 1.6% increase since the start of the year, equivalent to $32.4 billion in additional credit. Most of the growth accrued to the top decile of institutions by number of CRE loans, which collectively held just under $1.6 trillion – up 1.9% over six months. Other banks grew balances by 0.5% to $480.8 billion, giving them a 23.1% share of total lending.

 

Some smaller and mid-sized US regionals punched above their weight, posting growth on par with major systemic peers.

JP Morgan added $4.6 billion, a 2.6% climb, while Florida-based SouthState Bank and Virginia-headquartered Atlantic Union Bank saw their CRE loan books expand by $7.4 billion and $3.6 billion, respectively – surges of 64.3% and 44.5%.

The sharpest declines came from Flagstar Financial – the renamed New York Community Bank – followed by M&T Bank, Truist, Citi and PNC Bank. First Foundation notched the largest decrease proportionally, with its CRE portfolio shrinking 17.4%, or $915 million.

What is it?

According to 2006 interagency guidance from the US Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, CRE includes construction and land development loans – both secured by real estate and otherwise – loans secured by multi-family residential properties and loans secured by non-owner-occupied non-residential properties.

Regulators may subject a bank to heightened supervisory scrutiny if its CRE concentration ratio, relative to Tier 1 capital plus allowances on loans and leases, has exceeded 300% and CRE exposure has grown by 50% or more over the previous three years.

This analysis covers top-tier bank holding companies (BHCs) as well as Federal Reserve members not part of a BHC.

Acquisition, development and construction loans are defined as “construction, land development and other land loans” in regulatory filings. As outlined in the 2006 guidance, total CRE encompasses that category, plus “loans secured by multifamily residential properties”; “loans secured by non-owner-occupied non-farm non-residential properties”; and “loans to finance CRE, construction and land development, not secured by real estate”.

Why it matters

Recent disclosures by Western Alliance Bank and Zions Bank of alleged fraud by CRE investor Andrew Stupin have again frayed regional bank investors and revived the debate over whether problems are isolated or reflect broader weaknesses in underwriting. But is ‘CRE’ still the dirty word it was in early 2024?

The data sends mixed signals. On one hand, the H1 increases are remarkable, especially among smaller banks. On the other, activity in certain sub-segments has softened, perhaps for good reason.

Construction and land development loans – typically longer-term investments – fell 2.8% in the first half, with most of the decline concentrated in the second quarter. The end-June balance of $353.3 billion was down 6.4% from the Q1 2023 peak.

Similarly, high-volatility CRE loans – a more-leveraged subset that carries a 150% risk weight – slid 5.5% during the same period, hitting a record low of $26.3 billion.

 

Certain banks such as Flagstar and Valley National Bank remain above concentration thresholds, but the broader trend points to gradual balance sheet retrenchment. Aggregate CRE exposures as of end-June stood at 369% of banks’ Tier 1 capital and allowances, down 63 percentage points from the most recent peak in Q2 2023.

The question is whether this measured deleveraging – and the potential rebuilding of portfolios with more resilient or more adequate loan-to-value metrics – can continue under its own momentum before another left-field shock triggers a wider crisis.

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Risk Quantum readers now have access to the datasets behind our articles – not just the segment of data that is the focus for the story, but the full time series for all covered firms.

The Risk Quantum database currently includes 144 banks, 17 CCPs and 24 FCMs. The complete list of available metrics is accessible on this page, and the full range of covered organisations can be viewed here.

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