Weakness in large banks' nonowner-occupied CRE books persists in Q1 2024

US banks' nonowner-occupied property loans continued to show more weakness than owner-occupied properties in the first quarter, even as net charge-offs on commercial real estate loans fell sequentially.

In the first quarter, the banking industry's nonowner-occupied commercial real estate (CRE) loan delinquency ratio continued to rise, up 15 basis points sequentially to 1.86% of total loans on nonowner-occupied properties as of March 31. That delinquency ratio far outpaced the rate on owner-occupied property loans, which rose 5 basis points to 0.87%.

The disparity continued to be driven by distress in large banks' loans on nonowner-occupied properties. As in recent quarters, nonowner-occupied delinquencies and net charge-offs (NCOs) were sharply higher among banks with more than $100 billion in total assets, according to S&P Global Market Intelligence data.

Historically, both delinquencies and NCOs were higher for US banks' loans on owner-occupied CRE properties, but that trend reversed in recent years, and the performance of loans on nonowner-occupied properties worsened in 2023.

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Largest banks stand out

Delinquency ratios for nonowner-occupied CRE loans were lower than those for owner-occupied loans at banks smaller than $10 billion in assets in the first quarter, while delinquency ratios in the two categories were similar at banks between $10 billion and $100 billion in assets.

Among banks larger than $100 billion in assets, however, nonowner-occupied loans fared far worse, with a delinquency ratio of 4.41% at March 31, compared to 0.98% for owner-occupied properties.

The NCO rate for nonowner-occupied CRE loans was also worse at banks with more than $100 billion in assets, standing at 1.13% during the first quarter, though it was down 26 basis points from a quarter earlier.

Highest nonowner-occupied CRE concentrations

Among US banks with at least $5 billion in total CRE loans, Morgan Stanley had the highest proportion of nonowner-occupied loans to total CRE loans as of March 31, accounting for 97.9% of the company's CRE portfolio. Of that, 5.08% were delinquent — the fourth highest among banks in the analysis.

At Goldman Sachs Group Inc., nonowner-occupied loans accounted for 97.1% of the $7.50 billion CRE loan book that the company reported in bank regulatory filings. The delinquency ratio for those loans, which represented a portion of Goldman Sachs' firmwide CRE exposure, was 8.55% at March 31. While that ratio was down from 17.26% at the end of the third quarter of 2023, it was the highest delinquency ratio among banks on the list in the first quarter.

Bank OZK, which faced investor scrutiny over its real estate exposure in May, reported $5.59 billion in CRE loans as of March 31, representing 19.9% of total loans and leases. Of its total CRE loans, 88.0% were on nonowner-occupied properties, but its nonowner-occupied delinquency rate was a relatively low 0.28%.