The overall credit performance of commercial real estate (CRE) loans in bank portfolios continues to show signs of pandemic related stress with increasing delinquency rates and charge-offs and downward migration of risk ratings. While feedback from lenders indicates that relief granted through deferrals and forbearance early in the pandemic has kept delinquency rates from spiking further, several market sectors are clearly in distress.
Unsurprisingly, the delinquency rate for loans on hotels more than doubled, jumping from 1.3% in Q2 to 3.2% in Q3. Delinquency rates for loans on retail properties, while down slightly from Q2, are also significantly elevated and currently stand at 1.44%. The decrease in the retail delinquency rate in Q3 was in part driven by many loan charge-offs that effectively reduced the delinquent balance.
Risk Ratings, which are both reflective of current loan performance and expectations for future performance, have shifted significantly downward from pre-pandemic levels. On Trepp’s Standard Rating scale, a 1 to 9 risk rating scale that normalizes the risk ratings for all T-ALLR participants, the percent of loan balance rates 1 to 3 dropped from 42% to 31% while loans rated 6-9 jumped from 6% to 22%. As with delinquency rates, performance has been uneven across property types with loans on hotel and retail properties showing the greatest decline in Standard Rating. For hotel loans, the balance rated 1 to 3 dropped from 36% to 3.6% while loans rated 6 to 9 spiked from 5.1% to 74%.