Regional Banks Hold 13.8 Percent of CRE Debt, Not 80 Percent: Moody’s Analytics


Commercial real estate’s exposure to financial contagion risks now posed by U.S. regional banks is far more muted than recent headlines suggest, according to Moody’s Analytics.

A new Moody’s report, released Tuesday, shows that the 135 U.S. regional banks with between $10 billion and $160 billion of assets hold just 13.8 percent of CRE debt — far less than 65 to 80 percent numbers some experts have asserted. 

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Moody’s also noted that while CRE and regional banking still face headwinds in a rising interest rate environment, the sectors are far better positioned to respond to credit pressures than during the Global Financial Crisis (GFC) 15 years ago. Concerns about the country’s regional banking system have lingered since the collapse last month of Silicon Valley Bank (SIVBQ) and Signature Bank (SBNY)

“CRE loans have less leverage, asset pricing has more cushion, and borrowers have a more diverse set of debt sources, which puts the CRE debt market in a relatively better position given a 2008-style bank liquidity crunch,”  said the report, which was authored by Kevin Fagan, Matt Reidy, Thomas LaSalvia, Blake Coules and Victor Calanog. “Meanwhile, banks are considerably better capitalized than leading into 2008, and they have access to a wider array of credit facilities meant to backstop temporary liquidity issues and stem contagion.” 

Moody’s stressed that while more regional bank failures could place “strain” on the debt markets, CRE will benefit from a diverse number of lender participants that include large banks and a variety of alternative lenders like mortgage real estate investment trusts, life insurance companies and private bridge lenders to fill a potential gap. Lending will continue from various sources, but with interest rates roughly 150 basis points higher than loans originated between 2013 and 2018 along with debt service coverage ratio thresholds around 0.10 times larger.

The Moody’s analysis noted that higher borrowing costs and more stringent underwriting requirements will lead to a “rise in maturity default rates” while subsequently driving “a cyclical correction in many” weaker” CRE properties.  The bulk of CRE loans maturing in the next two years originated between 2013 and 2018 under “significantly more conservative” underwriting standards than those in the five years preceding the GFC, according to Moody’s. Loan-to-value ratios under this debt were on average 5 percent lower than pre-GFC.

“On average there are multiple relative credit positives that point toward a manageable downcycle for the CRE sector and its lenders, and both are in better shape than before the GFC,” the Moody’s report stated.  

The report cautions that looming loan maturities are facing major challenges with refinancing, with many likely headed for default. Moody’s projects that roughly 40 percent of borrowers with maturing loans will need additional equity capital to successfully refinance in the next two years.  

Andrew Coen can be reached at