Banking on Commercial Real Estate

Worries about U.S. banks' exposure to souring commercial-property loans have weighed on bank stocks, particularly regional ones. In the four months following the collapse of two lenders in March (and another failure in May), the MSCI USA Banks Index fell 15%, compared to a 12% increase for the MSCI USA Index.¹

Using data from MSCI Mortgage Debt Intelligence, we examined the commercial-mortgage originations of the seven regional banks and nine diversified banks in the MSCI USA Banks Index to identify exposures to the property types and markets under pressure.²

Comparing originations

Regional banks constituted 10.8% of the index’s closing weight at the end of July but accounted for 12.4% of the commercial-mortgage volumes originated by index constituents over the last decade.³

These regional banks were less active in office lending over the last decade, with only 18% of their originations in office, compared to 26% for diversified banks. Regional banks also originated a lower share in retail, industrial and hotels. They were more active in multifamily, with 47% of their volume in this property type, compared to 29% for diversified banks.

Looking at more recent originations and by geography, in the last 24 months diversified banks originated 29% of their volume in the 10 metros that recorded the largest overall price declines in the past year.⁴ Regional banks originated 24%, though shares varied significantly across the individual banks analyzed. Mortgages originated in these markets recently may be more vulnerable due to declining asset values.

The author thanks Adam Schreiber, Jim Costello and Michael Savino for their contributions to this post.