$1B Surge in Non-Owner Occupied CRE Loans in Q1 2022

U.S. Commercial Loans and REO Chart Historical [Q1 2022]

Commercial REO and defaults on non-owner occupied CRE mortgage loans appear to be on the rise. Banks reported a small uptick in distressed CRE loans at the end of Q1 2022, with some categories growing more than others.

The reversal of trends in commercial non-performing mortgage loans was not entirely unexpected due to the pandemic hangover and spikes in certain types of consumer and business debt at the end of last year.

The one big difference in this sector from other mortgages is there being more commercial REOs ($1.5B) than residential or MF combined.

At the end of Q1 2022, 735 banks reported that they held commercial REOs, a decline of almost 100 fewer banks than in Q4, and the same from the previous quarter. This could possibly be due to late reporting. Otherwise it suggests that some banks are finding themselves far more exposed to the defaults.

New bulk of defaults and delinquent loans still appear to be mostly non-owner occupied CRE loans in the non-accrual stage which make up 40% of all distressed loans in this category.

Overall, commercial real estate sales have been surprisingly strong considering the string of crises we now seem to be addicted to. However, industrial could be the next sector to fall, after office and retail which may taint the data even further. Investors have been focusing their capital on industrial real estate and apartment buildings instead.

U.S. Commercial Loans & REO Chart - Current [Q1 2022]

Moving into Q2 2022, non-performing loans held by banks included:

  • $1.3B in 30-89 day late owner occupied loans
  • $6.6B in nonaccrual stage non-owner occupied CRE loans
  • $2.7B in 30-89 day late non-owner occupied loans
  • $3.8B in nonaccrual stage owner occupied CRE loans

Note the almost $1B surge in 30-89 day late non-owner occupied loans from the previous quarter.

Find out which banks have the most non-performing commercial loans inside BankProspector.

Construction Debt

Even though overall distressed construction loan volume continued to fall through Q1 2022, we are seeing an increase in newly defaulting construction loan debt. This applies to both 1-4 family, and other construction loans.

There was just shy of $500M in construction REO being held by banks at the end of the quarter, just under the level of residential REO.

The largest percentage of this debt is made up of CRE loans in the non-accrual stage, at around $1.5B.

Extreme inflation, supply chain issues, never ending crises, and questions over the future of work and lifestyles continue to be factors at play here.

Other Debt


Farmland loan performance seems to have stayed pretty much on par with Q4 of last year.

The largest part of this pool is the $1B in non-accrual debt, followed by $390M in newly late loans, and around $82M in REO.

With land still selling swiftly, no huge crisis is anticipated in this sector yet.

Business Debt

Non-performing business debt levels appear to have leveled out after rising last year. The most significant increase this quarter is in the 90+ day late stage.

Investors looking for a big space to take on will find there were still almost $11B in nonaccrual stage loans in this category as of the beginning of Q2 2022.

Almost $11B in late C&I loans are behind that as well.

Consumer Debt: Auto Loans & Credit Cards

Auto Loans Chart Historical [Q1 2022]

Non-performing auto loans stayed pretty steady again in Q1, following a year-long trend in rising distress last year. A small seasonal dip in this volume in Q1 seen in graph form actually suggests we will see new highs in defaulting auto loans this year. Without a substantial drop in gas prices auto dealers and lenders could find many vehicles being returned.

Almost $8B of this pool is made up of newly late 30 to 89 day past due auto loans, 75% of the total non-performing pool.

Credit card performance has also continued to deteriorate over the last year. Over $15B in debt sits in this pool.

We predicted this trend could roll over into other forms of debt, which it seems to have done. Rising credit card defaults could further hit mortgage performance later this year.

Looking Ahead

While some sectors may have seen a plateauing of defaults, there are certainly hints of rising distress in the commercial sector overall. This may in turn eventually show up in the residential market over the quarters ahead.

Over the past quarter we’ve seen some stocks take pretty hefty losses, along with crypto. That doesn’t bode well for the office sector. Now Amazon has reportedly begun renting out its warehouse spaces to other companies as consumer spending on their site has declined. It may also be distancing itself from its huge bet in grocery with Whole Foods, which has faced some store closures.

One of the largest areas of opportunity for debt investors appears to be in the business debt sector. It is one of the largest in volume and one which may have less competition than residential real estate or multifamily.

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