Real Estate Loans are Down From a Year Ago. Here are Three Reasons Why. 

By the end of June, monthly U.S. real estate loans for all commercial banks decreased .09 percent from May to $5.6 trillion. This marks the first decrease since the same month last year (Figure 1).

Three factors were primarily behind the current downturn. 

Source: Federal Reserve Economic Data 

High Interest Rate and Restricted Lending  

High interest rates are significantly impacting the real estate loans sector. The Federal Reserve’s ongoing efforts to control inflation have led to increased borrowing costs, making it harder for property owners and investors to refinance or obtain new loans. 

Delinquency Rate on Commercial Real Estate Loans 

Source: Federal Reserve Economic Data 

Since July 2022, the delinquency rate for commercial real estate loans has increased from 0.6 percent to 1.2 percent, an 84 percent increase (Figure 2). Part of the reason for this is the low office occupancy rate.  

Banking Stress 

Moneywise reports that one-fifth of $4.7 trillion in outstanding commercial mortgages are maturing this year, imposing financial challenges on small and medium commercial banks as well as on private lenders given the higher interest rates and stricter lending standards. Meanwhile, national deposit rates of savings dropped in July from 0.45 to 0.36 percent (FRED). The decreased savings rates might tighten liquidity of banks and reduce lending capacity.  

Overall, the challenging environment of real estate loans has resulted in a more cautious lending environment. Stakeholders in the real estate and banking sector may continue to navigate these challenges carefully and manage risks effectively.