FDIC: CRE Credit Conditions Remained ‘Relatively Stable’ during Pandemic Downturn

While the total amount of commercial real estate loans held by banks has grown, individual institutions’ holdings of CRE loans relative to capital levels have remained below peaks observed during the last recession, the FDIC said in the latest edition of FDIC Quarterly. CRE credit conditions “remained relatively stable despite a sharp downturn in the U.S. economy in 2020” during the COVID-19 pandemic, the FDIC said. CRE delinquencies peaked at 1.11% in December of 2020, and had fallen to 0.87% by the third quarter of 2021, according to FDIC data.

The FDIC attributed the resilience of CRE credit to government stimulus, banks’ efforts to offer forbearance plans to their customers and economic factors—including low interest rates and a speedy economic rebound. However, the agency flagged several risks on the horizon, including the potential for loan performance to weaken as stimulus benefits sunset and loan modifications expire; low loan yields; persistent uncertainty in the CRE market; and continued pandemic-related stresses.

The FDIC acknowledged that certain sectors of the commercial real estate market may experience “lasting changes” as a result of the pandemic, particularly the office sector, given the significant shift in work habits and the reduced demand for office space, the FDIC said.

This edition of FDIC Quarterly also included a report examining the implications of the record deposits that flowed into FDIC-supervised banks during the pandemic. Among other things, the FDIC observed that the shift in banks’ asset composition and a prolonged interest rate environment have driven net interest margin to its lowest level on record.

“In the low interest rate environment, banks have been adding longer-term assets to their balance sheets in order to maintain or increase NIM,” the FDIC noted. “However, as interest rates begin to normalize, a higher share of longer-term assets may result in a longer-lasting negative effect on earnings pressure. Coming out of the pandemic, as loan demand is restored and deposits are presumably withdrawn, monitoring both the level and the composition of liquidity in the banking industry will remain important.”