Slumping office property values are rippling through US banks, with smaller lenders in particular ramping up the use of loan modifications in their commercial real estate (CRE) books.
The typical bank with less than US$100 billion of assets modified 0.32 per cent of its CRE loans in the first nine months of the year, a Moody’s Ratings report found. That is a big increase from the first half of 2024, when it was just about 0.1 per cent.
But it is also a far lower percentage than other kinds of lenders have modified: for medium-sized banks, the share was 1.93 per cent in the first nine months, and for the biggest, it is 0.79 per cent, the report found. The difference is probably not because smaller lenders made better loans, but rather, because they have been slower to confront declining commercial property prices.
Modifications are typically sought by struggling landlords looking to put off making payments and get short-term extensions on loans. Their increased use is the latest sign of rising distress in CRE credit as a wave of loans come due for refinancing.
Much of the focus is on regional banks, which are especially vulnerable because they often took lower down payments than their larger counterparts in the years leading up to the interest-rate hikes that began in 2022. That means they have less of a buffer before taking losses after office and apartment complex values fell at least 20 per cent since the peak.
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