As the U.S. CRE and construction markets face challenges, regional banks have been reducing their exposure by tightening standards and making fewer loans. According to new data from Trepp, many regional banks have exceeded key regulatory thresholds for exposure to the sector. Banks whose CRE or construction loan holdings exceed 300% and 100% of their total capital, respectively, should expect to receive greater regulatory scrutiny.
In order to comply with the regulatory guidance, banks may have to consider selling off CRE loans at a steep discount. Sellers may encounter limited interest and may have to take losses on the assets. JPMorgan has estimated that about 21% of outstanding office loans in commercial mortgage-backed securities will eventually default.
The new data underscores how acute and widespread the problem is across the banking sector. Banks may have to pull back on their lending to allow their CRE debt to roll off, or even divest parts or all of existing loan books. It remains to be seen how the situation will play out, but it is clear that regional banks will have to take action to comply with the regulatory guidance.