Page 1 GAO-24-107282 Commercial Real Estate
The amount of outstanding commercial real estate (CRE) loans held by banks
doubled from about $1.4 trillion to about $3 trillion from January 2012 through
January 2024. CRE loans are generally used to acquire, develop, construct,
improve, or refinance real property, such as office, multifamily, or retail
properties. However, recent declines in performance of certain CRE loans have
raised questions among regulators and industry observers about potential
negative effects on the broader financial system. In March 2024, New York
Community Bancorp required a $1 billion cash infusion to help it survive large
losses from its CRE portfolio. Banks with high CRE concentrations may be more
vulnerable to failure if their loan performance weakens.
The federal prudential banking regulators help ensure that banks are operating in
a safe and sound manner, including by monitoring the banks’ management of
CRE concentrations. These regulators are the Federal Deposit Insurance
Corporation (FDIC), the Board of Governors of the Federal Reserve System, and
the Office of the Comptroller of the Currency (OCC). We have ongoing work on
the regulators’ communication and escalation of supervisory concerns, which
could include concerns related to CRE concentration levels.
The shift to remote and hybrid work during the COVID-19 pandemic and rising
interest rates have intensified concerns about banks’ exposure to CRE. The
CARES Act includes a provision for GAO to monitor and oversee federal efforts
to address the COVID-19 pandemic. This report examines trends in the CRE
market, the pandemic’s impact on these trends, banks’ exposure to CRE
concentrations, and federal monitoring efforts related to CRE loans.
• The CRE market has experienced strains from the pandemic-related rise in
remote and hybrid work, rising interest rates, and declining prices since 2022,
particularly for office properties. These trends have made it harder for some
property owners to repay their loans.
• CRE loan delinquency rates have increased steadily since 2022 but remain
lower than during the 2007–2009 financial crisis.
• Banks have generally responded to the risks of potential CRE losses by
working with borrowers to modify loans and reduce delinquencies and
defaults. Many lenders have also reported tightening their lending standards
for CRE loans.
• Banking regulators monitor CRE lending and apply enhanced scrutiny to
banks with high CRE concentrations. CRE has been designated as an area
of supervisory focus, with regulators noting its potential risks to the broader
financial system. While currently deemed manageable, recent events, such
as significant losses experienced by New York Community Bancorp, highlight
the potential for systemic risk associated with CRE exposure.
U.S. Government Accountability Office
Trends, Risks,
and Federal Monitoring Efforts
-24-107282
Report to Congressional Committees
24, 2024
