In the ever-evolving world of financial investments, a 2023 trend is emerging that’s catching the eye of savvy investors – the uptick in CRE loan charge-offs by banks. Investors seeking value in the current market are taking note of the potential created in the distressed CRE loan sector.

The banking landscape is experiencing significant change as 2023 unfolds. Following a number of closures this year, banking institutions were dealt a further blow, when Moody’s cut the credit rating on a selection of smaller banks, while putting several bigger institutions on review for a potential credit downgrade.¹  

As banks adjust their strategies in light of recent events, they are taking measures to mitigate  risk in order to appease regulators, investors and depositors alike. Amidst this financial recalibration comes the need to offload distressed CRE loans from balance sheets, representing more opportunity for private investors in the distressed asset space.

This developing scenario, shaped by fluctuating interest rates, promises sustained value, even amidst the ebb and flow of rate hikes influenced by the Fed. Even when the hikes come to an end, rates are not expected to drop sharply, suggesting continued value for investors in this sector.²

Analysis from industry experts has shown that in terms of returns and risk expectations, distressed debt is much closer to equities than global core bonds, in terms of volatility, and integrating assets in this sector has upside potential.³

Historically, there have been four periods since the 2008 Global Financial Crisis when loan yields have exceeded 8%, and the market delivered strong outperformance over the ensuing 6-12 months for these periods. Therefore, experts suggest that income opportunities in this sector will continue in the coming year.² 

Now, as investors are seeking distressed CRE loan opportunities, it is reported that banks are charging off $19B in commercial real estate loans and consumer credit cards, in Q2 2023. This is a substantial 75% YoY increase.¹

While these figures do not differentiate between CRE loans and credit cards, data from the Fed⁴ shows that as of June, CRE loans from commercial banks totaled $2.92T, with the $19B charge-off suggesting a 0.65% rate, as per Globe St reporting. 

By comparison, the Q1 2023 charge-off rate on CRE loans was 0.07%,⁵ and an increase to 0.65% would represent a figure not seen since 2012.¹

Rather than undertaking a full charge-off, banks may seek to sell even more of their CRE loans. This was notably seen in May, when PacWest sold its CRE loan portfolio to Kennedy Wilson, with the real estate company indicating that it could double its portfolio of commercial real estate loans in the coming years, such is their commitment to the sector.¹

A continuation of these trends would present potential opportunities for debt investors, and those looking to achieve possible risk mitigation through a diversified portfolio, for some time to come.

Enter iintoo, offering a short-term senior debt fund that unlocks the potential of this opportunistic trend. With a carefully curated portfolio of real estate-backed loans, and established relationships with banking institutions, iintoo paves the way for private investors to explore the realm of this sector’s potential. If you are considering a timely investment in this sector you can login to our platform to learn more about this opportunity.

(1) Globe St: Banks Increase Their CRE Loan Charge-Offs

(2) Invesco: Floating rate features and “senior” status: further opportunity ahead for private credit assets / JP Morgan Leveraged Loan Index data. 

(3) Invesco: Integrating distressed debt to improve portfolio outcomes

(4) Federal Reserve: Assets and Liabilities of Commercial Banks in the United States – H.8

(5) Federal Reserve: Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks