Continued industrial real estate growth fueled stable commercial real estate conditions in the third quarter of this year, according to numbers from the FDIC. However, the FDIC cautions that the winding down of stimulus programs, ongoing pandemic stressors and loan modification agreements could pose challenges for future growth.
Government stimulus, loan policies, low interest rates and the quick economic recovery from the pandemic allowed CRE credit conditions to remain “ relatively stable” during the Covid-19 pandemic, according to the FDIC. Delinquent CRE loans held by FDIC-insured institutions increased in December 2020 to 1.1 percent but fell to below 0.9 percent by the third quarter of this year.
Industrial CRE market flourished, driven by the rapid growth of e-commerce — from first quarter 2020 through third quarter 2021, 582 million square feet of industrial space was rented, above the 366 million square feet in the nearly two years leading up to the pandemic. However, several property types came under stress, especially brick-and-mortar retail and hotel and office sectors. Despite that, loan delinquency rates remained low in the third quarter because of the ongoing economic recovery, stimulus and loan forbearance. Some of these changes could be permanent: Online shopping had already been growing before the pandemic, and Covid-19 spurred businesses to rethink their use of office space and explore remote work options. Forecasters are predicting increased office vacancy rates and relatively weak rent growth for 2022.
CRE lending is crucial for the banking industry, as FDIC-insured institutions hold $2.7 trillion in CRE loans — more than 50 percent of the banking industry’s share.
The influx of deposits during the pandemic could have long-term implications, according to the FDIC. The shift in banks’ assets and prolonged low interest rates have driven the net interest margin to its lowest level on record.
FDIC-insured institutions reported $69.5 billion in aggregate net income in the third quarter, a nearly 36 percent increase from the same time last year. Two-thirds of banks reported annual improvements in quarterly net income. The share of profitable institutions slightly increased year-over-year to nearly 96 percent.
“As interest rates begin to normalize, a higher share of longer-term assets may result in a longer-lasting negative effect on earnings pressure,” the FDIC stated. “Coming out of the pandemic, as loan demand is restored and deposits are presumably withdrawn, monitoring both the level and the composition of liquidity in the banking industry will remain important.”