S&P Warns of Risks as Bank Lending for Commercial Real Estate Exceeds 2008 Peak

By Esther FungFeaturesDow Jones Newswires

Bond ratings firm S&P Global Ratings said bank lending to the commercial real-estate sector has surpassed its 2008 peak, and with risks related to such loans rising, banks could face trouble.

Average commercial real-estate loans on banks' balance sheets reached $1.63 trillion as of the end of 2016, surpassing the previous peak of $1.52 trillion in 2008, S&P said in a note.

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Low interest rates, an improving U.S. economy and rising popularity of urban lifestyles have spurred real-estate markets across the country since 2012, leading to fast-rising property prices and elevated valuations.

At the same time, financing from commercial mortgage-backed securities hasn't been a major competitor to banks, S&P said. In an environment of interest-rate increases, such high asset values add risk for banks, given their heavy exposure to the sector.

"We believe the risk related to commercial real estate lending has increased, which could have negative rating implications over time," said S&P credit analyst Rian Pressman.

Smaller regional and community banks have larger concentrations of commercial real-estate loans, averaging around 20%, compared with 10% for the three largest domestically focused banks. All else being equal, the smaller banks have lower ratings reflecting incremental risk from such exposure to these loans.

An unexpected market shock, caused for example by a steeper-than-expected rise in interest rates, could raise borrowing costs for borrowers and slow reverse price growth, S&P said. Banks with exposure to energy-dependent regions, overheated multifamily markets or retail real estate facing challenges from e-commerce are more vulnerable, S&P said.

Write to Esther Fung at esther.fung@wsj.com

(END) Dow Jones Newswires

May 09, 2017 19:03 ET (23:03 GMT)