$14B in Non-Accrual Commercial Real Estate Loan Debt in Q2 2021

Banks reported holding around $14B in non-accrual CRE loan debt at the end of Q2 2021.

$14B in Non-Accrual CRE Loan Debt

While overall commercial loan defaults and non-performing mortgages have slid down by a few million since Q3 2020, the decline hasn’t been as notable as in the residential space.

The data suggests that while previous defaults may have been processed and run the course through the system, a new round of defaulting commercial mortgage loans began appearing in Q2 of 2021.

This may represent the end of stimulus money, the impact of rampant inflation, and the new wave of the Delta variant of COVID, which has resulted in the return of previous restrictions and many businesses postponing bringing workers back to the office setting.

At the end of Q2 2021, 989 banks reported they held a cumulative $2.3B in commercial REOs, which is up around $500M from Q3 2020.

Behind this are far more in defaulting commercial mortgage loans, including:

  • $1.2B in 30-89 day late owner occupied loans
  • $9B in non-accrual stage non-owner occupied CRE loans
  • $2B in 30-89 day late non-owner occupied loans
  • $5B in non-accrual stage owner occupied CRE loans

It’s worth noting that there are more than double the volume of commercial REOs than residential 1-4 family REOs.

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

Construction Debt

After appearing to peak in Q1 2021, overall distressed construction loan volume has fallen slightly.

Total non-performing construction debt is down by around $900M since Q3 2020, though there is almost as much construction REO being held by banks as residential REO.

The largest percentage of this debt is made up of loans in the non-accrual stage. This is one area of distressed assets which has been growing – up around $46M since Q3 2020.

Rising construction costs, labor shortages, and the shift away from office work and physical retail, as well as plateauing house prices are likely playing a role in these defaults.

Business (C&I) Loans Chart [Q2 2021]
$15B in non-accrual stage loans

Business C&I Debt

Non-performing business C&I debt has continued to decline since mid-2020. This trend line is likely partially thanks to low interest rates and some rebounding in consumer and business spending.

Still, there were $15B in non-accrual stage loans in this category as of Q2 2021. An area that’s seen an increase is 90 day plus late C&I loans, which have risen to over $1.07B.

Looking Ahead

Overall commercial debt performance seems to have mimicked the residential sector, with declining defaults this year.

However, there are a couple of pockets where distressed debt is creeping up, including 90 day plus late business loans and non-accrual stage construction debt.

There are also still double the amount of commercial REOs than residential.

Looking forward, the data seems to predict that the debt space may see improved performance. However, there are sectors which offer great opportunity, and perhaps less competition.

Much is going to rely on various forms of government stimulus and policy, as well as the ability of the millions of now voluntarily unemployed to keep up their bullish consumer spending.

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