Commercial Mortgage Distress Continues to Climb in Q2 2023

U.S. Commercial Two Year Historical – Q2 2023

Every commercial debt sector appears to have deteriorated this quarter, with the exception of farmland loans, which have continued to outperform other classes of mortgage debt.

The latest round of data seems to be in line with the financial distress many businesses and consumers are saying they are struggling with, even if Bank of America, and JPMorgan have joined the Fed in reversing their predictions of a pending recession.

An uptick in commercial REO this quarter reversed the slight improvements of the previous three quarters. And with $14.3B in nonaccruals stacking up, the REO figure will continue to grow over the next few months unless lenders and borrowers can work things out.

Let’s dive into the data…

CRE Nonaccrual Loans Reach Two-Year High

U.S. Commercial – CRE Nonaccruals Two Year Historical Q2 2023

Moving into Q3 2023 non-performing loans held by banks included:

  • $1.1B in 30-89 day late owner occupied loans
  • $10.9B in nonaccrual stage non-owner occupied CRE loans
  • $2.3B in 30-89 day late non-owner occupied loans
  • $3.5B in nonaccrual stage owner occupied CRE loans

The largest pool of non-performing loans is in nonaccrual stage non-owner occupied loans, more than double what it was in Q2 2022.

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

U.S. Commercial – Commercial Dev Nonaccruals Two Year Historical Q2 2023

Construction Debt

Construction loan debt performance has deteriorated as well.

The largest percentage of this debt is in commercial development loans, which are now in the nonaccrual stage and total just over $1.7B. This is followed by newly defaulting loans in the 30-89 day late stage, a pool of over $1.2B in loans.

Banks are still sitting on just under half a billion dollars in construction REO, with 397 banks now reporting holding these non-performing assets.

Other Debt


Farmland debt is the one exception this quarter, a sector that has continued to improve and outperform all others over the past two years.

The largest part of this pool is around $630M in nonaccrual debt, followed by $344M in newly late loans, and just $56M in REO.

This suggests that this is the one sector which continues to see strong market absorption of any distressed debt and properties.

Business Debt

Banks are reporting a reversal in business debt performance from Q1. Based on seasonal trends, we could also see a big uptick in delinquencies in this space in Q3.

More than $12B in non-perfoming C&I loans appear to have rolled over into the nonaccrual stage, up from $10.8B in Q1. Newly late loans have remained in line with the previous quarter’s figures, while the 90 day plus category saw a slight drop.

Consumer Debt: Auto Loans & Credit Cards

U.S. Commercial – Credit Cards – Two Year Historical Q2 2023

Both auto loan and credit card debt have continued their two-year streak of worsening performance.

It appears that no amount of confidence or bullish predictions from the top are able to trump the real fundamentals in the economy.

Ongoing hyperinflation, high taxation, rising interest rates, and tens of millions of jobs being wiped out by AI are not likely to help create any change here over the next couple of quarters.

Around $12B in auto loans have recently fallen into default with around $27B in credit card debt now non-performing.

Looking Ahead

Commercial mortgage loan performance is tanking as expected.

Almost every sector is showing worsening performance with some categories steadily climbing in value. More distress is expected in Q3, especially in the business loan space.

The one stand-out performer continues to be farmland loans.

Deteriorating fundamentals, a massive economic transition, the ongoing remote vs. in-office work push-pull, and AI revolution all appear to be taking a toll on commercial properties and debt in Q2 2023.

Whether lenders and note holders are positioned to stop the damage remains to be determined, though, there are clearly developing opportunies for investors to find great deals in the commercial space.

Log in now to see which banks are holding the most distressed notes.

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