Banks have reemerged in the commercial real estate lending space after more than a year of dormancy. Their comeback has been fueled by finding ways to purge their balance sheets of troubled property loans.
Deals with private equity firms and private credit funds, along with a reinvigorated CMBS market, have allowed financial institutions — particularly regional players who are more heavily exposed to CRE debt — to do so while minimizing their losses, lenders and analysts say.
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Banks have been able to push troubled loans off their books without recognizing steep losses.
“[Banks are] heavily incentivized to get these loans off their books,” Peachtree Group CEO Greg Friedman said. “I would say private credit has been a backstop to this whole economy. Without private credit, banks would be in real trouble right now.”
Methods to get CRE loans off the books have varied among financial institutions. But the net result has been a spike in fresh CRE lending among banks whose previous void paved the way for private capital to step in as the lender of choice among CRE investors and firms.
As a result, delinquencies for bank-owned commercial real estate debt fell in the fourth quarter for the first time since 2022 by nearly 2%. At the same time, charge-offs jumped 20 basis points as lenders wrote off $1B worth of office debt.
Banks have been walking a tightrope to mitigate losses and keep delinquencies down since the onset of the pandemic by extending and modifying maturing debt where they can.
Roughly 40% of the $957B in commercial real estate debt coming due in 2025 was previously extended, according to a March report by Colliers.
Some banks have bundled their troubled CRE loans and marketed them for sale to investors at a loss while keeping the performing pieces, said Christopher Marinac, the director of research for Atlanta-based wealth management firm Janney Montgomery Scott.
There’s growing demand among institutional investors and private capital for bank-made CRE loans, even riskier ones, because they’re still producing cash flow.
“I think at the end of the day it doesn’t really matter if it’s a [collateralized loan obligation] or an insurance company or another form of private capital taking the loan on,” Marinac said. “As long as the cash flow supports that deal, it works.”
Marinac said banks are now under renewed pressure to make new loans and are scouring the market for deals from sponsors.
“Loan growth is very sparse, and most banks are missing their loan growth target,” he said. “So if they can find a well-structured real estate deal that has limited leverage and is properly underwritten, they’re all over that.”
Banks accounted for 34% of non-agency commercial real estate loans in the first quarter, up from 22% a year ago, according to CBRE. CMBS lending rose from 9% of the CRE debt market to 26%. The market share from alternative lenders, by contrast, fell from 48% a year ago to 19%.
California-based bank First Foundation securitized roughly $500M of the $1.9B in multifamily loans it put up for sale in Q3 2024, helping to draw down its commercial real estate exposure to make new loans, said Scott Kavanaugh, its CEO until he retired in December.
A First Financial Bank branch in Cincinnati, Ohio.
The result forced First Financial to mark-to-market the pricing of the assets and report a loss in Q3. But Kavanaugh had said in a press release at the time that as the bank finds buyers and reprices the loans over the next two to three years, “we expect final pricing to exceed currently estimated fair values.”
“So we took what appeared to be a big loss in the third quarter, but it was a paper loss because we hadn’t sold any loans,” he said in an interview this week.
A message to First Financial on the status of the remaining portfolio of loans held for sale was not returned as of press time.
While banks must set aside funds for what they expect will be losses on loans, efforts to minimize those losses appear to be working. About 60% of 82 banks that reported first-quarter earnings in April booked provisions for credit losses below consensus estimates, with 68% of those banks recording lower-than-expected net charge-offs, S&P Global Market Intelligence reported.
Atlanta-based real estate credit firm Peachtree Group has been active in lending to banks to get CRE loans off their books in recent months, especially looking for ways where the banks can avoid taking major losses, Friedman said.
In some instances, Peachtree will buy struggling loans from a bank for more than its ultimate value and get a new loan from the financial institution to cover the difference, Friedman said. But instead of the loan being categorized as backed by CRE, the banks record the debt on their commercial and industrial loan books, lowering their ratio of CRE holdings and allowing them room to provide new mortgages.
“Banks are also able to conduct a bulk sale of seasoned loans to create liquidity and reinvest in new loans,” Sundip Patel, CEO of private credit CRE lender Avana Cos., said in an email. “This allows them to get the cash and remove the future loss by selling off the risk. Banks can re-amortize, provide temporary rate reduction and waive certain covenants to report minimal losses.”
Even when banks get struggling loans off their books, there’s still risk in the system. The underlying troubles of commercial real estate remain, said Jon Winick, CEO of Los Angeles-based loan sale advisory firm Clark Street Capital.
Winick said the risk with troubled CRE loans may have shifted off of banks’ books, but they’re still in the financial system, just subject to less regulation. If private credit lenders see a spike in delinquent and defaulting borrowers, it could still have a broader market impact.
Plus, many of the buyers of these loans are betting on interest rates being cut in the coming months, Winick said, noting that this prediction has eluded the market so far.
“There’s certainly a narrative spin, ‘Oh yeah, we’re resolving our issues.’ The closer you look in, the more banks are kicking the can down the road and it could come back and bite them,” Winick said. “So far, for the banks, everything is fine. And some of that is because the risk has pushed to private credit.”