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1 1 (November 16, 2023)

handle is hein.crs/govenlq0001 and id is 1 raw text is: Congressional ____ e' Research Service Bank Exposure to Commercial Real Estate November 16, 2023 The economic turmoil resulting from the pandemic negatively affected commercial real estate (CRE), particularly by leading to a sharp, albeit temporary, increase in delinquencies among commercial mortgage-backed securities. As the economy recovers from the pandemic, some CRE owners with mortgages outstanding are continuing to face pressure from a decline in lease payments. Missed payments potentially jeopardize owners' ability to repay their lenders, many of which are banks. According to the Federal Deposit Insurance Corporation (FDIC), more than 98 percent of banks engage in CRE lending and CRE loans are the largest loan portfolio type for nearly half of all banks. This Insight examines the extent to which banks are exposed to CRE risk and explores issues Congress may find relevant. Overview of CRE Market Stress The CRE market is large and complex. Most of the properties are owned or leased by private companies, so valuing the market is difficult. Banks are the largest lender of CRE mortgages and hold around $3 trillion in CRE debt on their balance sheets. Nonbank financial institutions also play a significant role. CRE comprises many subsectors, including office and industrial space, retail storefronts, apartments, hotels, health care facilities, and other specialty properties such as sports venues, storage units, and data centers, but stress is concentrated in office and retail space. CRE mortgages are financed on shorter terms than residential mortgages, often with balloon payments due at maturity, often two to five years. Trepp, an industry analysis firm, estimates that $448 billion in CRE loans are maturing in 2023, with about $270 billion of that coming from bank loans. In the retail subsector, leases on many retail spaces tend to last between three and five years. This means that many of the tenants of properties with mortgages coming due are deciding whether or not to renew their leases. In the office subsector, due to the convergence of work-from-home policies and other economic pressures, many companies that rent space from CRE owners are not renewing their leases, and some are breaking their leases or trying to renegotiate terms. This is evidenced by higher office vacancy rates, which hit all- time highs earlier this year. A loss of rental income will lead to higher default rates among CRE owners. This is compounded by the coinciding maturities of many CRE mortgages, which will accelerate defaults if rental income cannot sufficiently offset the balloon payment obligations or if alternative financing cannot be procured. Congressional Research Service https://crsreports.congress.gov IN12278 CRS INSIGHT Prepared for Members and Committees of Congress

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