Overall commercial non-performing mortgages have continued to gradually decline in volume throughout the year, with dynamics that overall seem to mimic what has been happening in the residential sector.
The one big difference is there are more commercial REOs than residential. At the end of Q3 2021, 920 banks reported holding a combined $2.1B in commercial REOs.
New defaults and late loans appear to be far dwarfed by those that have been shifted into the non-accrual stage.
Like the residential sector, new data shows commercial real estate sales have hit new record highs. Of course, office and retail have become much less popular, with industrial, apartments, and distribution centers making up most recent acquisitions.
Moving into Q4 2021, non-performing loans included:
- $1.3B in 30-89 day late owner occupied loans
- $7.9B in non-accrual stage non-owner occupied CRE loans
- $1.8B in 30-89 day late non-owner occupied loans
- $4.4B in non-accrual stage owner occupied CRE loans
Find out which banks have the most non-performing commercial loans inside BankProspector.
After appearing to peak in Q1 2021, overall distressed construction loan volume fell by around $500M as of the beginning of Q4.
Total non-performing construction debt now stands at around $3.7B. Note 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, at $1.8B, with just over $800M in late loans behind that.
Supply chain woes, labor shortages, extreme inflation, and seismic shifts in work and lifestyle continue to be factors here.
Business C&I Debt
Total non-performing business debt continued the decline this quarter, following the same trend since mid-2020. Low interest rates, stimulus, and price hikes may have helped in this.
However, while total non-performing loans fell to just over $17.7B, there was an increase in new defaults and late payments. This category grew by over $200M in volume in the past three months. There were also still $11.5B in non-accrual stage loans in this category as of Q3 2021.
Overall the commercial mortgage sector seems to have mimicked the residential sector in performance this quarter.
Strong CRE sales activity has definitely been pivotal in keeping more defaults from happening. A lot will depend on consumer sentiment and spending through the end-of-year holiday season as well as ongoing record-setting property sales activity at record high prices.
Conversions will likely be a notable theme ahead though they may be hampered by inflation and the supply chain.
Spikes in other debt shouldn’t be ignored. While REO inventory has been slim, growing defaults among auto loans, credit cards, and non-real estate business loans could signal a bigger wave of distress coming soon.
Right now, the market is ripe for investors to take advantage of this gap between distress and record demand and values. It is all about gaining access to the inventory.
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