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Regional banks are intensifying preparations to better handle a worst-case financial fallout as commercial real estate (CRE) loans continue to face challenges this year.Â
Reuters reports that several regional banks are increasing their provisions for credit losses to mitigate the risks associated with troubled CRE loans and an investment environment filled with high-interest rates.Â
A big factor driving these precautions is the ongoing struggle of the office loan sector, which has been particularly hurt in the post-pandemic economy. The rise of remote work environments has left many office buildings vacant, feeding fears of massive mortgage defaults. Moody’s recent Q2 2024 Preliminary Trend report shows the office sector set a record vacancy rate at 20.1% last quarter, breaking the 20% barrier for the first time in history.  Â
High-interest rates have further complicated refinancing options, adding to the strain felt by these property owners.Â
Several banks such as M&T Bank are reportedly pivoting their strategies to reduce CRE exposure — focusing instead on commercial and industrial lending. Â
Others, like BankUnited have increased the amount of money they set aside in case CRE loans don’t get paid back.Â
Multi-family commercial loan portfolios, mainly held by smaller lenders, are also found to be showing signs of stress in large marketplaces including New York and Florida, partly due to stringent rent control regulations, according to Reuters.Â
By reinforcing their financial frameworks now, regional banks are better positioned to support future growth and stability in challenging scenarios. However, they are not resorting to panic sales of their distressed assets. Â
Instead, reports say they are strategically letting these loans run off their balance sheets. Some banks are awaiting potential interest rate cuts by the Federal Reserve, which could enable them to secure better prices for their assets.Â
