The U.S. banking system remains under pressure due to significant exposure to the commercial real estate (CRE) market, exacerbated by persistently high interest rates. As a result, banks face increasing risks as potentially troubled loans approach maturity, according to an analysis by Florida Atlantic University (FAU).

Since 2023, troubled debt restructuring for commercial construction, multifamily housing, and both owner-occupied and non-owner-occupied mortgages has surged, tripling to $18 billion in the fourth quarter of 2024. This marks a sharp increase from $6 billion recorded in the second quarter of 2023.

While more than half of this distressed debt stems from non-owner-occupied nonfarm and non-residential properties, the FAU report highlights “serious deterioration” in multifamily and commercial construction loans.

As of the fourth quarter, 59 out of the 158 largest U.S. banks face CRE exposure exceeding 300% of their total equity capital. FAU’s U.S. bank exposure screener identifies the most vulnerable financial institutions, including Flagstar Bank, Zion Bancorp, Valley National Bank, Synovus Bank, Umpqua Bank, and Old National Bank.

Across banks of all sizes, 1,788 institutions now have CRE exposure surpassing 300%, up from 1,697 in the third quarter. Nearly 1,000 banks have exposure exceeding 400%, 504 exceed 500%, and 216 surpass 600%. Meanwhile, the aggregate industry-wide CRE exposure remains at 132%, unchanged from the previous quarter.

Regulators have been urging banks to reduce their exposure, but doing so without signaling financial weakness presents a major challenge, according to Rebel A. Cole, a finance professor at FAU’s College of Business.

“To navigate this situation, many banks are resorting to an ‘extend and pretend’ approach, restructuring loans by extending their maturities under the same terms,” Cole explained.

This strategy allows lenders to postpone refinancing in hopes that interest rates will decline, making repayment more manageable in the future.

Source:  GlobeSt.