Trends, Risks, and Federal Monitoring Efforts (GAO-24-107282)
Summary
A GAO Q&A report to congressional committees, GAO-24-107282, dated September 24, 2024, on commercial real estate (CRE). It reports that the amount of outstanding CRE loans at banks doubled from about $1.4 trillion to about $3 trillion from January 2012 through January 2024. It states that recent declines in the performance of certain CRE loans have raised questions about potential negative effects on the broader financial system, and that in March 2024 New York Community Bancorp required a $1 billion cash infusion after large losses from its CRE portfolio. The report covers trends, risks and federal monitoring efforts by the prudential banking regulators.
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U.S. Government Accountability Office
COMMERCIAL REAL ESTATE: Trends, Risks,
and Federal Monitoring Efforts
GAO-24-107282
Q&A Report to Congressional Committees
September 24, 2024
Why This Matters The amount of outstanding commercial real estate (CRE) loans held by banks
doubled from about $1.4 trillion to about $3 trillion from January 2012 through
January 2024. CRE loans are generally used to acquire, develop, construct,
improve, or refinance real property, such as office, multifamily, or retail
properties. However, recent declines in performance of certain CRE loans have
raised questions among regulators and industry observers about potential
negative effects on the broader financial system. In March 2024, New York
Community Bancorp required a $1 billion cash infusion to help it survive large
losses from its CRE portfolio. Banks with high CRE concentrations may be more
vulnerable to failure if their loan performance weakens.
The federal prudential banking regulators help ensure that banks are operating in
a safe and sound manner, including by monitoring the banks’ management of
CRE concentrations. These regulators are the Federal Deposit Insurance
Corporation (FDIC), the Board of Governors of the Federal Reserve System, and
the Office of the Comptroller of the Currency (OCC). We have ongoing work on
the regulators’ communication and escalation of supervisory concerns, which
could include concerns related to CRE concentration levels.
The shift to remote and hybrid work during the COVID-19 pandemic and rising
interest rates have intensified concerns about banks’ exposure to CRE. The
CARES Act includes a provision for GAO to monitor and oversee federal efforts
to address the COVID-19 pandemic. This report examines trends in the CRE
market, the pandemic’s impact on these trends, banks’ exposure to CRE
concentrations, and federal monitoring efforts related to CRE loans.
Key Takeaways • The CRE market has experienced strains from the pandemic-related rise in
remote and hybrid work, rising interest rates, and declining prices since 2022,
particularly for office properties. These trends have made it harder for some
property owners to repay their loans.
• CRE loan delinquency rates have increased steadily since 2022 but remain
lower than during the 2007–2009 financial crisis.
• Banks have generally responded to the risks of potential CRE losses by
working with borrowers to modify loans and reduce delinquencies and
defaults. Many lenders have also reported tightening their lending standards
for CRE loans.
• Banking regulators monitor CRE lending and apply enhanced scrutiny to
banks with high CRE concentrations. CRE has been designated as an area
of supervisory focus, with regulators noting its potential risks to the broader
financial system. While currently deemed manageable, recent events, such
as significant losses experienced by New York Community Bancorp, highlight
the potential for systemic risk associated with CRE exposure.
Page 1 GAO-24-107282 Commercial Real Estate
What are the types of CRE is primarily composed of office, multifamily, retail, lodging, and industrial
CRE properties? sectors.
• Office: General-use, leasable properties primarily designed for business
operations
• Multifamily: Residential properties with five or more dwelling units, such as
apartment buildings
• Retail: Shopping centers, malls, and single-tenant retailers
• Lodging: Economy, luxury, and extended-stay hotels
• Industrial: Warehouses, manufacturing facilities, and data centers, which are
usually outside major metropolitan centers
How have CRE prices Two key indicators of CRE trends—prices and capitalization rates—suggest that
and capitalization rates credit and other risks associated with CRE lending have increased since 2018.
changed since 2018? Prices. Between February 2018 and August 2022, CRE prices increased by
about 44 percent, according to Real Capital Analytics (RCA) Commercial
Property Price Indexes data (see fig. 1). 1 However, prices then declined about 11
percent from August 2022 through December 2023 (the most recent data
available). CRE prices experienced the largest year-to-year decrease between
October 2022 and October 2023 since the end of 2009, according to International
Monetary Fund data. 2 From August 2022 through January 2024, prices dropped
for all property types except industrial properties, primarily driven by the
pandemic-spurred shift to remote work and a rapid increase in interest rates.
Office properties in central business districts, which have been disproportionately
affected by remote work, saw the largest declines. In September 2023, prices of
properties outside central business districts surpassed those within them. In
general, declining property prices have resulted in rising bank losses from CRE
loans.
Figure 1: Real Capital Analytics Commercial Property Price Index, 2018–2023
Note: Prices are based on the Real Capital Analytics Commercial Property Price Indexes, which measure the
actual price movements for commercial properties based on transaction data. The indexes are based on repeat-
sales transactions that occurred at any time through the month of the current report. The indexes are estimated
using transaction data collected through the reported month to the date of production. December 2006 = 100.
Page 2 GAO-24-107282 Commercial Real Estate
Capitalization rates. CRE capitalization rates were generally stable between
2018 and 2021 but have risen since 2022 (see fig. 2). Capitalization rates
represent the ratio of a property’s net operating income to its market value.
Properties with higher rates for the area typically produce larger monthly cash
flows but tend to appreciate less over time. Higher rates also reflect higher
potential risks for investors and banks, and may be elevated because the
property is in an undesirable area (which lowers property values) or a sector with
a historically high default rate. From January 2018 through December 2023, the
office and retail sectors had the highest capitalization rates, whereas multifamily
had the lowest.
Figure 2: Capitalization Rates for Commercial Real Estate Properties, by Sector, 2018–2023
Note: Capitalization rates were not available in Bloomberg for the lodging sector as of January 2024.
How has remote and Office buildings have experienced higher vacancy rates than other forms of
hybrid work affected commercial properties since at least 2007, and the increase in remote and hybrid
the office sector? work since 2020 has pushed those rates even higher.
According to Bloomberg data, office properties have had higher vacancy rates
than multifamily or retail properties since 2007, and the gap has widened since
2018. 3 The vacancy rates for all properties were relatively stable from 2012
through the end of 2019. But beginning in the second quarter of 2020, the
vacancy rate for all property types increased, with office properties experiencing
the largest increases through 2023 (see fig. 3). It is likely that the published office
vacancy rates underrepresent the amount of vacant office space, as space that is
leased but not fully used may turn into vacancies once those leases come up for
renewal.
Page 3 GAO-24-107282 Commercial Real Estate
Figure 3: Vacancy Rates for Office, Retail, and Multifamily Properties, 2018–2023
Note: Vacancy rates were calculated by Moody’s Analytics REIS and accessed through Bloomberg.
The COVID-19 pandemic contributed to this widening gap. From April 2020
through September 2021, the amount of commercial office space vacated or
newly constructed surpassed the amount newly leased by tenants. This marked
the first “negative net absorption” since 2012, and it generally persisted through
at least the end of 2023.
Office utilization, although rising, remains below pre-pandemic levels. One
indicator found that in-office use averaged about 48 percent of pre-pandemic
levels across 10 metropolitan cities as of April 2024. 4 According to Moody’s, 13
of the 25 largest U.S. office markets had a decrease in actual rent paid for office
properties between the fourth quarters of 2019 and 2023, reflecting the impact of
remote work. 5
While the office sector as a whole has faced stress, certain types of office
properties have performed well. For example, medical offices, which generally
have lower levels of remote work, have demonstrated stable performance.
Similarly, buildings that offer attractive locations and amenities have maintained
high demand.
Who holds CRE loans? About half of outstanding CRE loans are held by banks. According to Federal
Reserve data, as of October 2023 (the most recent data we obtained), about $3
trillion of the $5.9 trillion in outstanding CRE loans was held by banks. The
remaining loans were held by certain government-sponsored enterprises (Fannie
Mae and Freddie Mac), life insurance companies, commercial mortgage-backed
securities, government entities, Ginnie Mae, and real estate investment trusts
and finance companies (see fig. 4). 6
Page 4 GAO-24-107282 Commercial Real Estate
Figure 4: Outstanding Commercial Real Estate Debt by Source, as of October 2023
Note: GAO summary of CRE Finance Council analysis of Federal Reserve data.
How has bank CRE Banks have generally increased their CRE loan holdings since 2018, and loan
lending changed since size, demand, and exposure have varied by bank size.
2018? Banks’ loan holdings. Since 2018, the total amount of CRE loans has
increased for banks of all sizes, but the largest banks had more fluctuations in
growth compared to other banks. Our analysis of bank financial statement filings
found that very small (less than $1 billion in assets), small ($1 billion to less than
$10 billion in assets), and medium-sized banks ($10 billion to less than $100
billion in assets) generally increased their CRE loan holdings each quarter from
2018 through the end of 2023. 7 In contrast, the total value of CRE loans held by
large banks (at least $100 billion in assets) fluctuated more quarter-to-quarter
during that period (see fig. 5). 8
Page 5 GAO-24-107282 Commercial Real Estate
Figure 5: Commercial Real Estate Loans Held by Banks (Adjusted for Inflation to 2023
Dollars), by Bank Asset Size, 2018–2023
Median loan amount held by banks. The median amount of CRE loans held by
banks increased with bank size. For example, the median amount of CRE loans
held by medium-sized banks at the end of 2023 (about $6.2 billion) was about
nine times larger than the median size held by small banks ($682 million). 9
Loan demand. Demand for new CRE loans generally decreased from 2018
through 2023. Banks reported decreased demand for CRE loans in more than
two-thirds of the quarters during that period, according to a Federal Reserve
survey of bank senior loan officers. 10 Despite this, the total amount of outstanding
CRE loans increased almost every week since January 2018, according to
Federal Reserve data. The increase was due in part to banks extending the
terms of many expiring loans.
CRE loan exposure. The share of CRE loans in banks’ portfolios increased from
2018 through 2023 (see fig. 6). Our analysis found that the median CRE loan
proportions for very small, small, and medium-sized banks increased by about 4,
6, and 2 percentage points, respectively, during that period. In contrast, large
banks increased their median CRE loan proportions by about 0.1 percentage
point. According to credit rating agency officials, banks with more assets usually
have more diversified revenue streams and are less reliant on CRE loans than
smaller banks.
Page 6 GAO-24-107282 Commercial Real Estate
Figure 6: Median Bank-Level Percentage of Commercial Real Estate Loans to Total Loans
and Leases, by Bank Asset Size, 2018–2023
The percentage of CRE loans banks hold relative to the value of their total loan
holdings varies by bank size. Our analysis shows that from 2018 through 2023,
CRE loans accounted for at least 23 percent of the total value of loans each year
for very small, small, and medium-sized banks, but less than about 13 percent for
large banks. Additionally, the proportion of the value of CRE loans to total loans
increased by about 5 percentage points for very small, small, and medium-sized
banks since 2018.
Further, more very small banks have higher concentrations of CRE loans than
larger banks. For example, we found that at least 130 very small banks held
construction, land development, and other land loans exceeding 100 percent of
their total capital (the threshold regulators use to identify banks with high CRE
concentrations) in all but three of the 24 quarters from 2018 through 2023. In
contrast, fewer than 12 medium-sized banks and no large banks exceeded this
threshold each quarter (see fig. 7).
Page 7 GAO-24-107282 Commercial Real Estate
Figure 7: Banks with Construction and Land Development Loans Exceeding 100 Percent of
Total Capital, by Bank Asset Size, 2018–2023
Note: No large banks exceeded the 100 percent total capital threshold from 2018 through 2023.
How can CRE loans CRE loans can pose risks to banks when borrowers have difficulties making loan
pose risks to banks? payments or default on their loans, especially for banks with large concentrations
of CRE loans. Borrowers may struggle to repay their CRE loans due to inflation
and rising vacancy rates, which can increase operating costs and decrease
revenues. In addition, CRE loans typically have shorter maturities and balloon
payments, and borrowers usually refinance their loans at maturity instead of
repaying the outstanding balance. High interest rates and declining real estate
prices can make it difficult for borrowers to refinance, as they may be unable to
meet their bank’s debt servicing requirements. 11 This increases the likelihood of
loan default.
If not properly managed, potential losses from CRE loan defaults can increase
the risk of bank failure. CRE lending concentrations, combined with weak risk-
management practices, have contributed to past bank failures. For example,
CRE loan losses have been identified as contributing to bank failures during the
2007–2009 financial crisis. More recently, New York Community Bancorp
suffered significant losses in its CRE portfolio, particularly within its office and
multifamily loans. As a result, in March 2024, the bank received a $1 billion cash
infusion from investors to help bolster its capital levels and keep the bank afloat.
Looking ahead, Trepp, an industry data firm, projects that about 20 percent
(about $1.2 trillion out of $5.9 trillion) of the outstanding CRE loans will mature in
2024 and 2025, of which more than half are held by banks. 12 The large scale of
maturing loans and related potential defaults can create stress on banks,
particularly for those with high CRE loan concentrations.
The percentage of the total value of CRE loans that are delinquent (at least 30
days past due) has rapidly increased since the third quarter of 2022 for loans at
large banks, while other banks have seen more modest increases (see fig. 8).
Page 8 GAO-24-107282 Commercial Real Estate
Figure 8: Percentage of the Total Value of Commercial Real Estate Loans That Are
Delinquent, by Bank Asset Size, 2018–2023
The delinquency rate for CRE loans increased every quarter from July 2022
through December 2023, according to Federal Reserve data. The delinquency
rate peaked in December 2023 at about 1.2 percent, the highest rate since
March 2015. In contrast, during and immediately after the 2007–2009 financial
crisis, the delinquency rate was at least 2.5 percent, peaking at about 9 percent
at the end of 2009. According to FDIC officials, CRE loans held by banks with
$100 billion or more in assets generally accounted for the recent increase in
delinquencies.
Banks also face some exposure to CRE risk through their investments in
commercial mortgage-backed securities. Issuance of these securities has
generally declined in recent years—from about $110 billion in 2021 to about $39
billion in 2023, according to Mortgage Bankers Association data. 13 At the same
time, FDIC reported that the delinquency rate for the loans underlying these
securities has risen, reaching 4.7 percent in February 2024. 14 While loans for
multifamily, lodging, retail, and industrial properties experienced some increases
in delinquency rates between February 2023 and February 2024, the office
sector accounted for much of the total increase during that period, according to
Trepp data. 15 The loan delinquency rate of office properties increased from about
2.4 percent in February 2023 to about 6.6 percent in February 2024, surpassing
retail properties to become the sector with the highest delinquency rate.
How are banks Banks are managing CRE loan risks by modifying loans and tightening
managing risks posed underwriting standards.
by CRE loans? Loan modifications. In general, banks have increasingly modified their CRE
loans to manage risks and potential losses by extending loan terms or reducing
interest rates. According to one study, the frequency of CRE loan modifications
Page 9 GAO-24-107282 Commercial Real Estate
rose from about 1.5 percent per quarter in late 2019 to about 17 percent by the
end of 2020. 16 According to analysis reported by Trepp, this trend has continued
more recently, as the amount of newly modified securitized loans increased from
less than $500 million to about $2.5 billion between the first quarters of 2022 and
2024. 17 As previously discussed, CRE loans typically have shorter maturities and
balloon payments. 18 Therefore, with extended loan terms, borrowers can
continue repaying their loans at their existing, lower interest rate until the balloon
payment comes due or the loan is subsequently refinanced.
Tighter underwriting standards. More lenders reported tightening underwriting
standards from July 2022 through December 2023, based on the Federal
Reserve’s quarterly survey of bank senior loan officers. 19 For example, from
October 2022 through December 2023, 40 percent or more of surveyed lenders
reported having tightened underwriting standards for CRE loans (1) with
construction and land development purposes, (2) of multifamily residential
structures, or (3) of nonfarm, nonresidential structures. This suggests that banks
are becoming more cautious and reevaluating the extent to which they can take
on new exposure in CRE markets.
How do banking Banking regulators (FDIC, the Federal Reserve, and OCC) monitor CRE lending
regulators monitor CRE through their supervision of banks, using on-site examinations and off-site
lending through monitoring. 20
supervision? Banking supervision is intended to help ensure banks operate in a safe and
sound manner and comply with applicable federal banking laws and regulations.
To oversee banks and bank holding companies, banking regulators conduct
examination activities that target specific functional areas or business lines,
including CRE lending. Regulators also use off-site monitoring to monitor the
financial condition of individual banks and the banking system. 21 In addition, the
regulators monitor the banking sector and broader financial stability through
stress tests that evaluate whether certain large banks and holding companies
have sufficient capital to remain financially sound under economic stress.
In December 2006, the regulators jointly issued guidance on CRE concentrations
and sound risk-management practices, describing their expectations for banks
with concentrations in CRE loans. The guidance identified internal control areas
to identify, monitor, and manage CRE concentration risk. It established the
following three criteria for identifying banks that could be subject to greater
supervisory scrutiny:
1. Rapid growth in CRE lending
2. Notable exposure to a specific type of CRE
3. Approaching or exceeding the following supervisory criteria: (a) total
reported loans for construction, land development, and other land
representing 100 percent of more of the bank’s total capital; or (b) total
CRE loans represent 300 percent or more of the bank’s total capital, and
the outstanding balance of the bank’s CRE loan portfolio has increased
by 50 percent of more during the prior 36 months 22
In 2018, we found that the risk-management framework of the regulators’ 2006
CRE guidance was adequately designed to help ensure that banks effectively
identify, measure, monitor, and manage their CRE concentration risk. We also
found that the framework was consistent with credit and concentration risk
principles issued by international standard-setting bodies and with internal control
standards. 23
In 2023, the banking regulators updated their guidance on managing CRE
portfolios in all business cycles, particularly during challenging economic
Page 10 GAO-24-107282 Commercial Real Estate
environments. The updated guidance established risk-management practices for
short-term accommodations and encouraged financial institutions to work
proactively and prudently with borrowers who may struggle to repay loans during
periods of financial stress. We compared these updates made since 2018
against relevant federal internal control standards for risk assessment and found
that the updated guidance was generally consistent with these standards. 24
What additional steps Banks with relatively high CRE concentrations, as identified by criteria described
do regulators take for above, may receive enhanced monitoring from regulators. This includes
banks with high CRE regulators analyzing potential risks and the banks’ practices for managing the
concentrations? risks. Examiners may also increase supervisory monitoring for banks that have
not exceeded the CRE concentration thresholds if other risk factors are present,
such as rapidly growing CRE loan portfolios or market risks.
According to the regulators, between 2018 and 2023, the number of banks with
high CRE concentrations (those exceeding the thresholds) that received
enhanced monitoring ranged from 335 to 437 banks annually. Of these years,
2023 saw the largest number of banks receive enhanced monitoring. FDIC
officials noted that the agency temporarily heightened its monitoring of CRE
exposures at FDIC-supervised community banks in 2023. The Federal Reserve
also intensified supervisory efforts to assess banks’ preparedness for managing
credit risks, including for CRE-concentrated state member banks, according to an
agency report. Federal Reserve officials stated that the regulator implemented
these efforts beginning in August 2022
In general, the number of banks exceeding the regulatory concentration
thresholds gradually increased each quarter from 2021 through the first quarter
of 2023, but then slightly decreased during the last three quarters of 2023.
Overall, about 530 banks exceeded the regulatory concentration thresholds as of
December 31, 2023 (see fig. 9).
Page 11 GAO-24-107282 Commercial Real Estate
Figure 9: Banks with Concentrations in Construction and Land Development and
Commercial Real Estate Loans, 2018–2023
Note: We define commercial real estate (CRE) concentrations as construction and land development loans
representing 100 percent or more of a bank’s total capital or CRE nonowner-occupied loans representing 300
percent or more of a bank’s total capital and with 50 percent growth over the previous 36 months.
What concerns have FDIC, the Federal Reserve, OCC, and credit rating agencies have expressed
regulators and credit concerns about the CRE market’s potential impact on the financial system. The
rating agencies raised? regulators have identified CRE as a risk to banks and the financial system, citing
potential declines in property valuations that could lead to significant losses for
banks with concentrated CRE exposures. Additionally, they noted that
refinancing CRE loans remained a challenge for both borrowers and the banking
industry due to high interest rates, softening property values, and emerging credit
weaknesses. 25
FDIC, the Federal Reserve, and OCC also identified weaknesses in risk-
management practices for some banking institutions. The Federal Reserve’s
2024 Supervision and Regulation report stated that, as of December 2023, about
two-thirds of large financial institutions (those with assets of $100 billion or more)
did not receive satisfactory ratings across all of the regulator’s rating
components. 26 The report noted an increase in supervisory findings related to
weaknesses in liquidity and interest rate risk-management practices. According
to the report, some large financial institutions have generally increased
provisions for credit losses, including CRE loan losses. 27
While the majority of community and regional banks had satisfactory ratings,
there was an increase in rating downgrades due to weaknesses in interest rate
and liquidity risk-management practices, according to the Federal Reserve
report. Although some community and regional banks reported deteriorating CRE
loan performance, their overall asset quality remained sound.
Page 12 GAO-24-107282 Commercial Real Estate
In 2023, FDIC reported that examiners observed weaknesses in some banks’
risk-management practices, such as missing loan-level data, unsupported
projections when assessing repayment capacity, and risk rating frameworks that
generally lacked objective financial metrics or criteria. 28 FDIC also stated that
banks substantively involved in CRE lending weathered the pandemic better
when they had robust contingency planning and stress testing processes in
place.
Credit rating agencies have reported that CRE credit quality is beginning to
decline among certain lenders and property types. For example, Fitch reported in
December 2023 that the ratio of nonperforming CRE loans to total loans had
increased for nine consecutive quarters among banks with total assets over $250
billion. 29 Larger banks have more exposure to central business district properties,
which have experienced more pricing pressures and a higher risk of default. In
contrast, smaller banks have generally maintained stable or improved CRE loan
performance but remain exposed to significant losses from their higher CRE
concentrations, according to Fitch.
To what extent have Trends in the CRE market pose risks to financial stability, but these risks appear
regulators and others to be manageable for most banks, according to banking regulators. For example,
reported that CRE risks the Federal Reserve has cautioned that weakness in economic activity could
affect financial compound existing CRE market strain and amplify financial system risks. 30
stability? Banking regulators and others remain cautious, emphasizing the importance of
closely monitoring CRE risks due to their contribution to past bank failures, such
as the failures of small and medium-sized banks following the 2007–2009
financial crisis. 31 A July 2024 Office of Financial Research analysis found that
many banks with high CRE concentrations share similar financial conditions to
banks that failed in 2023, such as large unrealized securities losses and high
proportions of uninsured deposits. 32
In December 2023, the Financial Stability Oversight Council recommended that
regulators continue to closely monitor CRE exposures and market conditions. 33
Similarly, in January 2024, the International Monetary Fund noted that it will be
important for U.S. banking regulators to conduct ongoing monitoring and
management of CRE risks to mitigate the potential risks to financial stability.
Banking regulator officials stated that they have heightened their supervisory
monitoring of banks with high CRE concentrations and continue to analyze CRE
market conditions.
To address concerns identified through supervisory monitoring, regulators may
raise supervisory concerns to banks, which could lead to an enforcement action if
identified improvements are not made. However, we have reported on long-
standing concerns about the timeliness of such escalation. In 2023, we found
that the Federal Reserve and FDIC did not escalate supervisory concerns in time
to mitigate key risks that led to the failures of Silicon Valley Bank and Signature
Bank, respectively, despite identifying weaknesses in the banks’ liquidity and
risk-management practices. 34
In March 2024, we found that FDIC updated its procedures for escalating
supervisory concerns. We also recommended that the Federal Reserve revise its
procedures on when to escalate supervisory concerns to be clearer and more
specific. 35 The Federal Reserve agreed with our recommendation but had not yet
implemented it as of July 2024. We have ongoing work on the regulators’
communication and escalation of supervisory concerns, which could include
concerns related to CRE concentration levels.
Page 13 GAO-24-107282 Commercial Real Estate
FDIC, Federal Reserve, and OCC officials stated that banks are generally
positioned to manage CRE risks and their potential threats to financial stability.
The Federal Reserve’s 2024 annual stress test showed that large banks could
withstand a hypothetical severe global recession and heightened stress in
commercial and residential real estate and corporate debt markets, with an
average projected CRE loss rate of 8.8 percent. 36 Although community banks are
not subject to the stress test and have higher CRE concentrations than large
banks, FDIC reported in 2024 that community banks had lower aggregate CRE
loan delinquency rates, suggesting that risks to financial stability are potentially
manageable. 37
Further, regulators have observed that the banking sector’s profitability has
remained stable in the higher interest-rate environment, with generally stabilized
liquidity and favorable asset quality metrics. These factors may help banks
maintain an adequate level of liquidity, meet financial commitments, and weather
challenges posed by CRE loan risks.
While regulators have noted that CRE risks are currently manageable, economic
weakness and CRE concentration could amplify financial system risks. The
experience of New York Community Bancorp illustrates the significant losses
possible from CRE exposure. Further, the March 2023 closures of Silicon Valley
Bank and Signature Bank underscored systemic risks. As the Financial Stability
Oversight Council and International Monetary Fund noted, it will be important for
the regulators to monitor CRE risks and the implications for financial stability.
Agency Comments We provided a draft of this report to FDIC, the Federal Reserve, and OCC for
review and comment. FDIC and the Federal Reserve provided technical
comments, which we incorporated as appropriate. OCC did not have any
comments on the report.
How GAO Did This To describe CRE market trends since 2018, we reviewed industry reports and
Study articles on the CRE market. We also analyzed price index, vacancy rate, and
office utilization information using data from the RCA Commercial Property Price
Indexes, Moody’s Analytics REIS, and the Kastle Workplace Occupancy
Barometer, respectively. We accessed these data through the Bloomberg
Terminal, a computer software system provided by the financial data vendor,
Bloomberg L.P., which contains real-time financial market data. We used data
from the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending
Practices from January 2018 through January 2024 (the most recent data
available at the time of our analysis) to analyze relative demand for CRE loans. 38
To describe changes since 2018 in U.S. banks’ CRE exposure and the potential
effects of these changes on credit availability, we reviewed industry reports and
articles, and analyzed bank financial statement filings. We analyzed data from
Consolidated Reports of Condition and Income (also known as call reports) for
2018 through 2023, the most recently available full year data at the time of our
analysis, for all banks that filed a report and were active as of December 2023. 39
Using these data, we calculated banks’ construction and land development and
CRE concentrations during the period. Specifically, we used the concentration
formulas in the regulators’ CRE concentration guidance to calculate banks’ non-
owner occupied CRE concentrations and identify banks whose CRE
concentrations exceeded the guidance’s CRE concentration thresholds during
the time frame. 40
We categorized the banks according to their total assets as of the end of 2023.
We defined banks with less than $1 billion in total assets as very small, between
Page 14 GAO-24-107282 Commercial Real Estate
$1 billion and less than $10 billion as small, between $10 billion and less than
$100 billion as medium-sized, and at least $100 billion as large. We accessed
the financial data through FactSet, a financial data vendor and interface that
contains real-time financial market data. We adjusted the data for inflation to
quarter four 2023 dollars using the Quarterly Chain-Weighted Gross Domestic
Product Price Index.
We also analyzed quarterly Federal Reserve data on CRE delinquency rates and
results from its Senior Loan Officer Opinion Survey on Bank Lending Practices to
determine the extent to which banks have tightened underwriting standards for
CRE loans. These CRE loans included those (1) with construction and land
development purposes, (2) secured by multifamily residential structures, and (3)
for nonfarm nonresidential structures. 41
For the data we analyzed from the Bloomberg terminal, FactSet, and the Federal
Reserve, we assessed the reliability of the data. This assessment included
reviewing related documentation, interviewing data providers, and conducting
electronic testing. We determined that these data were sufficiently reliable for
describing trends in CRE and banks’ concentrations of CRE loans.
To describe federal banking regulators’ oversight of CRE lending activities, we
reviewed and analyzed their relevant guidance and regulations on bank CRE
lending, and examination policies and procedures. We also reviewed reports that
FDIC, the Federal Reserve, OCC, and industry observers, such as credit rating
agencies, have issued on risks to the financial sector. We analyzed the extent to
which the guidance has changed since 2018.
We also determined that the risk assessment component of internal control was
significant to this objective, along with the underlying principles that management
should identify, analyze, and respond to risk related to achieving the defined
objectives. We compared the 2023 guidance (the most recent at the time of our
analysis) against federal internal control standards to determine the extent to
which the updated guidance was consistent with the risk assessment
component. 42 We also reviewed information from FDIC, the Federal Reserve,
and OCC on their enhanced monitoring of banks with high CRE concentrations
from 2018 through 2023.
To inform all our work, we also interviewed officials from the three financial
regulators that supervise banks (the Federal Reserve, FDIC, and OCC) for their
perspectives on the CRE market, risks to banks, and information on their
monitoring efforts. We interviewed officials from the three largest credit rating
agencies (Fitch Ratings, Moody’s Analytics, and S&P Global Ratings) and Trepp,
an industry participant that collects and analyzes CRE-related data, for their
perspectives on the CRE market and risks to banks.
We conducted this performance audit from January 2024 to September 2024 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objectives.
List of Addressees The Honorable Patty Murray
Chair
The Honorable Susan Collins
Page 15 GAO-24-107282 Commercial Real Estate
Vice Chair
Committee on Appropriations
United States Senate
The Honorable Ron Wyden
Chairman
The Honorable Mike Crapo
Ranking Member
Committee on Finance
United States Senate
The Honorable Bernard Sanders
Chair
The Honorable Bill Cassidy, M.D.
Ranking Member
Committee on Health, Education, Labor and Pensions
United States Senate
The Honorable Gary C. Peters
Chairman
The Honorable Rand Paul, M.D.
Ranking Member
Committee on Homeland Security and Governmental Affairs
United States Senate
The Honorable Tom Cole
Chair
The Honorable Rosa L. DeLauro
Ranking Member
Committee on Appropriations
House of Representatives
The Honorable Cathy McMorris Rodgers
Chair
The Honorable Frank Pallone, Jr.
Ranking Member
Committee on Energy and Commerce
House of Representatives
The Honorable Mark E. Green, M.D.
Chairman
The Honorable Bennie G. Thompson
Ranking Member
Committee on Homeland Security
House of Representatives
The Honorable James Comer
Chairman
The Honorable Jamie Raskin
Ranking Member
Committee on Oversight and Accountability
House of Representatives
The Honorable Jason Smith
Chairman
The Honorable Richard Neal
Page 16 GAO-24-107282 Commercial Real Estate
Ranking Member
Committee on Ways and Means
House of Representatives
We are sending copies of this report to the appropriate congressional
committees, the Chairman of the Federal Deposit Insurance Corporation, Acting
Comptroller of the Currency, Chair of the Board of Governors of the Federal
Reserve System, and other interested parties.
GAO Contact For more information, contact: Michael Clements, Director, Financial Markets and
Information Community Investment, ClementsM@gao.gov, 202-512-8678.
Sarah Kaczmarek, Managing Director, Public Affairs, KaczmarekS@gao.gov,
(202) 512-4800.
A. Nicole Clowers, Managing Director, Congressional Relations,
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Staff Acknowledgments: Tarek Mahmassani (Assistant Director), Juliann
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Endnotes
1The RCA Commercial Property Price Indexes measure the actual price movements for commercial
properties based on transaction data. The indexes are based on repeat-sales transactions that
occurred at any time up through the month of the current report. They are estimated using
transaction data collected through the reported month to the date of production.
2Overall CRE prices increased by about 28 percent between 2018 and 2024, according to RCA
data. According to International Monetary Fund data, prices dropped about 7.5 percent between
September 2022 and September 2023. In contrast, year-to-year prices decreased at least 23
percent from March 2009 through December 2009 following the 2007–2009 financial crisis,
compared to the previous year. International Monetary Fund, Commercial Real Estate Prices for
United States [COMREPUSQ159N], retrieved from FRED, Federal Reserve Bank of St. Louis;
https://fred.stlouisfed.org/series/COMREPUSQ159N, July 10, 2024.
3The vacancy rate is the percentage of all available units in a rental property, such as a hotel or
apartment complex, that are vacant or unoccupied at a particular time. The vacancy rate is the
opposite of the occupancy rate, which is the percentage of units in a rental property that are
occupied.
4The Kastle Workplace Occupancy Barometer reflects swipes of Kastle access controls (used to
enter a building) for commercial office buildings from 10 cities that have 300,000 of the 1.8 million
total Kastle users globally. Data are reported weekly and compared to a 3-week daily credential
use average in February 2020. The metropolitan areas included in the survey are Austin, TX;
Chicago, IL; Dallas, TX; Houston, TX; Los Angeles, CA; New York, NY; Philadelphia, PA; San
Francisco, CA; San Jose, CA; and Washington, DC. We accessed these data through the
Bloomberg Terminal.
5According to Moody’s data, San Francisco saw the largest decline in office rents, with a drop of
almost 29 percent. This decline was partly driven by a 19-percentage-point increase in its vacancy
rate, attributable to its high concentration of industries using hybrid work. Moody’s Investor Service,
CMBS-US: Converting Pandemic-Hit Offices Will Likely Trim Loan Losses While Aiding Housing
Supply (New York, NY: Moody’s Corporation, Mar. 5, 2024).
Page 17 GAO-24-107282 Commercial Real Estate
6A real estate investment trust generally owns income-producing real estate or real estate-related
assets and may be publicly traded on a stock exchange. Commercial mortgage-backed securities
are securities backed by mortgages for CRE, such as office buildings or shopping centers.
Government CRE includes properties owned by state and local governments or special authorities,
such as stadiums and hospitals.
7There were 3,647 banks with less than $1 billion in assets (very small), 836 with $1 billion to less
than $10 billion in assets (small), 125 with $10 billion to less than $100 billion in assets (medium)
and 33 banks with at least $100 billion in assets (large).
8We accessed the data through FactSet, a financial data vendor and interface that contains real-
time financial market data.
9The median amount held by very small banks at the end of 2023 was about $44 million, by small
banks about $682 million, by medium-sized banks about $6.227 billion, and by large banks about
$19.919 billion.
10The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices surveys
up to 80 large domestic banks and 24 U.S. branches and agencies of foreign banks. The Federal
Reserve generally conducts the survey quarterly, timing it so that results are available for the
January/February, April/May, August, and October/November meetings of the Federal Open
Market Committee. Questions cover changes in the standards and terms of the banks' lending and
the state of business and household demand for loans. The survey results are not generalizable to
all domestic banks or to U.S. branches and agencies of foreign banks.
11Banks impose minimum debt-service coverage ratios and maximum loan-to-value requirements
that borrowers must meet. Lower valuations for the property create to higher loan-to-value ratios,
while diminished cash flows lead to reduced debt service coverage ratios.
12As of May 2024, Trepp projected that about $640 billion in total commercial loans would mature in
2024 and about $540 billion in 2025. Trepp, “CRE Mortgage Maturities & Debt Outstanding – Q4
2023 update” (New York, NY: May 8, 2024).
13Mortgage Bankers Association, Commercial/ Multifamily Quarterly Databook: Q1 2024
(Washington, D.C.: Mortgage Bankers Association, June 28, 2024).
14While delinquency rates for commercial mortgage-backed securities have been increasing
recently, Federal Reserve officials stated that banks typically hold agency commercial mortgage-
backed securities (those issued by a U.S. agency or federally chartered corporation) and that such
securities usually have the lowest risk of default. FDIC, Risk Review: 2024 (Washington, D.C.: May.
22, 2024).
15Trepp, “CMBS Delinquency Rate Inches Up in February, Driven by Office Sector” (New York, NY:
Mar. 1, 2024).
16David Glancy, Robert J. Kurtzman, and Lara Loewenstein, “Loan Modifications and the
Commercial Real Estate Market," Finance and Economics Discussion Series, 2022-050,
(Washington, D.C.: July 26, 2022).
17The modification volume peaked during the third quarter of 2023 at $3.9 billion. Trepp, “A Deep
Dive into CMBS Loan Modification Trends” (New York, NY: May 2024).
18A borrower may be able to refinance its CRE loan before the balloon payment comes due. A
borrower may hesitate to refinance the loan, however, if the interest rate offered by the bank is
higher than its current interest rate on the balloon loan. In these or other cases, a bank may offer
the borrower a loan extension, which extends the term of the loan, delaying the balloon payment
and allowing the borrower to continue paying at their current interest rate.
19Underwriting standards include factors such as the capacity of the borrower or income from the
underlying property to adequately service the debt; the market value of the underlying real estate
collateral; the overall creditworthiness of the borrower; and the level of the borrower’s equity
invested in the property. We report results from the Federal Reserve’s Senior Loan Officer Opinion
Survey, which summarizes changes in underwriting by the “net percentage” of banks tightening
underwriting standards on various classes of loans. This refers to the percentage of banks that
reported tightening standards minus the percentage of banks that reported loosening standards. A
positive number indicates that more banks are tightening than loosening standards.
Page 18 GAO-24-107282 Commercial Real Estate
20The Federal Reserve supervises state-chartered banks that are members of the Federal Reserve
System, and bank and savings and loan holding companies, among others. FDIC supervises
insured state-chartered banks that are not members of the Federal Reserve System, as well as
state-chartered savings associations and insured state-chartered branches of foreign banks. FDIC
also administers the Deposit Insurance Fund, which insures the deposits of all banks and savings
associations that are approved for federal deposit insurance. In this role, FDIC has supervisory
authority over all banks and savings associations that are federally insured, as well as special
examination authority over nonbank financial companies supervised by the Federal Reserve, or
certain bank holding companies. OCC supervises federally chartered national banks and savings
associations and federally chartered branches and agencies of foreign banks. The National Credit
Union Administration supervises federally chartered credit unions and insures deposits in federally
insured credit unions, which may include state-chartered credit unions, among others. We excluded
credit unions from our report because they do not issue many CRE loans.
21For example, Federal Reserve officials noted that the regulator monitors CRE risk and trends by
reviewing regulatory filings, examination reports and private sector data. Using this information, the
Federal Reserve identifies individual banks that are outliers. For some banks, the Federal Reserve
also meets regularly with bank management and reviews bank-provided risk reports.
2271 Fed. Reg. 74580 (Dec. 12, 2006). Capital generally is defined as a bank’s long-term source of
funding, contributed largely by the bank’s equity stockholders and its own returns in the form of
retained earnings. One important function of capital is to absorb losses. In March 2020, the
prudential banking regulators issued an interagency statement to clarify the calculation of total
capital (tier 1 capital plus allowance for credit losses attributed to loans and leases). OCC, Federal
Reserve, and FDIC, Joint Statement on Adjustment to the Calculation for Credit Concentration
Ratios Used in the Supervisory Approach (Mar. 30, 2020).
23GAO, Commercial Real Estate Lending: Banks Potentially Face Increased Risk; Regulators
Generally Are Assessing Banks’ Risk Management Practices, GAO-18-245 (Washington, D.C.:
Mar. 15, 2018).
24In July 2023, the banking regulators and the National Credit Union Administration updated and
expanded their 2009 guidance on prudent CRE loan workouts. Policy Statement on Prudent
Commercial Real Estate Loan Accommodations and Workouts, 88 Fed. Reg. 43115 (July 6, 2023).
In December 2023, FDIC issued an advisory on managing CRE concentrations in a challenging
economic environment, noting that recent weaknesses in the current economic environment related
to CRE sectors, including the office sector, had increased FDIC’s overall concern for institutions
with concentrations of CRE loans. The advisory reemphasized the importance of strong capital,
appropriate credit loss allowance levels, and robust credit risk-management practices when
managing CRE concentrations. FDIC, Advisory: Managing Commercial Real Estate Concentrations
in a Challenging Economic Environment (Washington, D.C.: Dec. 18, 2023).
25Federal Reserve, Financial Stability Report (Washington, D.C.: Apr. 2024). FDIC, Risk Review:
2024. OCC, Semiannual Risk Perspective from the National Risk Committee (Washington, D.C.:
June 18, 2024).
26Regulators assess the strength of banks using the Uniform Financial Institutions Rating System,
also known as CAMELS. Bank examiners rate an institution on each CAMELS component (capital
adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk) and assign
an aggregate rating to each bank based on the components.
27In May 2024 the Public Company Accounting Oversight Board published guidance on auditing
considerations for CRE which encouraged auditors to monitor market developments and the
potential for broader economic issues that could affect a wider group of public companies. The
guidance included a list of example questions related to CRE for auditors to consider when
planning and conducting the audit.
28FDIC, Commercial Real Estate: An Update on Bank Lending Amid the Evolving Pandemic
Backdrop (Washington, D.C.: Mar. 2023).
29Fitch Ratings, U.S. Bank Commercial Real Estate: Delinquencies Rising, Losses to Come (New
York, NY: Dec. 5, 2023).
30Federal Reserve, Financial Stability Report (Washington, D.C.: Apr. 2024).
31GAO, Financial Institutions: Causes and Consequences of Recent Bank Failures, GAO-13-71
(Washington. D.C.: Jan. 3, 2013).
Page 19 GAO-24-107282 Commercial Real Estate
32Office of Financial Research, Bank Health and Future Commercial Real Estate Losses
(Washington, D.C.: July 11, 2024).
33Financial Stability Oversight Council, Annual Report 2023 (Washington, D.C.: Dec. 14, 2023). The
Dodd-Frank Wall Street Reform and Consumer Protection Act created the Financial Stability
Oversight Council in 2010 to identify and respond to potential risks to the stability of the U.S.
financial system.
34GAO, Bank Regulation: Preliminary Review of Agency Actions Related to March 2023 Bank
Failures, GAO-23-106736 (Washington. D.C.: Apr. 28, 2023).
35GAO, Bank Supervision: More Timely Escalation of Supervisory Action Needed, GAO-24-106974
(Washington, D.C.: Mar. 6, 2024).
36Federal Reserve, 2024 Federal Reserve Stress Test Results (Washington, D.C.: 2024).
37FDIC, Risk Review: 2024.
38These CRE loans included those (1) with construction and land development purposes, (2)
secured by multifamily residential structures, and (3) for nonfarm nonresidential structures. Federal
Reserve, Net Percentage of Domestic Banks Reporting Stronger Demand for Commercial Real
Estate Loans with Construction and Land Development Purposes [SUBLPDRCDC], retrieved from
FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/SUBLPDRCDC; Net
Percentage of Domestic Banks Reporting Stronger Demand for Commercial Real Estate Loans
Secured by Multifamily Residential Structures [SUBLPDRCDM], retrieved from FRED, Federal
Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/SUBLPDRCDM; Net Percentage of
Domestic Banks Reporting Stronger Demand for Commercial Real Estate Loans Secured by
Nonfarm Nonresidential Structures [SUBLPDRCDN], retrieved from FRED, Federal Reserve Bank
of St. Louis; https://fred.stlouisfed.org/series/SUBLPDRCDN.
39We considered banks that filed a call report in December 2023 and reported more than “0” total
assets to be active.
40The regulator guidance provides that the agencies will use three different criteria to identify banks
that are potentially exposed to significant CRE concentration risk. One of those criteria, which we
used for our calculations, establishes CRE concentration thresholds. Specifically, banks may be
identified for enhanced monitoring if they are approaching or exceeding (1) total reported loans for
construction, land development, and other land representing 100 percent or more of the bank’s
total capital; or (2) total non-owner occupied CRE loans representing 300 percent or more of the
bank’s total capital, and the outstanding balance of the bank’s CRE loan portfolio has increased by
50 percent of more during the prior 36 months. 71 Fed. Reg. 74580 (Dec. 12, 2006).
41Federal Reserve, Delinquency Rate on Commercial Real Estate Loans (Excluding Farmland),
Booked in Domestic Offices, All Commercial Banks [DRCRELEXFACBS], retrieved from FRED,
Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DRCRELEXFACBS; Net
Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans with
Construction and Land Development Purposes [SUBLPDRCSC], retrieved from FRED, Federal
Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/SUBLPDRCSC; Net Percentage of
Domestic Banks Tightening Standards for Commercial Real Estate Loans Secured by Multifamily
Residential Structures [SUBLPDRCSM], retrieved from FRED, Federal Reserve Bank of St. Louis;
https://fred.stlouisfed.org/series/SUBLPDRCSM, and Net Percentage of Domestic Banks
Tightening Standards for Commercial Real Estate Loans Secured by Nonfarm Nonresidential
Structures [SUBLPDRCSN], retrieved from FRED, Federal Reserve Bank of St. Louis;
https://fred.stlouisfed.org/series/SUBLPDRCSN.
42GAO, Standards for Internal Control in the Federal Government, GAO-14-704G (Washington,
D.C.: Sept. 10, 2014).
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