Real Estate: Shore nonaccrual rises, refinancing warnings persist
Lenders reported divergent commercial real estate credit measures and retained refinancing warnings, alongside improvements in office occupancy and leasing assessments.
Commercial real estate lender Shore Bancshares Inc (SHBI) reported nonaccrual CRE balances of $64.8 million at June 30, up from $52.4 million at March 31. The company reported a $2.6 billion CRE portfolio at both dates.
Burke & Herbert (BHRB) retained its warning between May and August that central business district office borrowers face decreased valuations, oversupply attributed to remote work, and rising interest rates that have “increased default rates and impeded their ability to secure new financing.”
Burke & Herbert reported a larger real estate exposure behind that unchanged warning. Including owner-occupied commercial real estate and acquisition, construction and development loans, exposure increased from $3.7 billion at March 31 to $5.5 billion at June 30. The June balance represented 68.8% of gross loans. The company cautions that deterioration in one or a few large CRE loans could significantly increase its nonperforming-loan percentage and lead to lost earnings, higher provisions and charge-offs.
Commercial real estate lender Blue Ridge Bankshares, Inc. (BRBS) also continued to warn that higher capitalization rates may impair collateral values and complicate refinancing. In August, the company described “heightened risk” because interest rates remain above levels that may have prevailed when its CRE loans originated; renewing or refinancing those loans can increase borrowers' debt-service costs. The lender LCNB Corp. (LCNB) retained its warning between May and August that higher debt-service costs may be difficult to pass on to tenants. It said it stresses interest rates and occupancy during origination and monitors industry credit trends to assess whether underwriting standards warrant changes.
The lender Farmers National Banc Corp (FMNB) reported improved occupancy measures for office and multifamily collateral. Weighted-average office occupancy increased to 85.86% at June 30 from 81.72% at March 31. Multifamily weighted-average occupancy also increased over that period. Those changes concerned the properties backing its loans; its tables separately identified occupancy for other property categories, including hotels and multifamily construction.
The real estate investment trust Kilroy Realty Corporation (KRC) described “continuing improvement in commercial real estate fundamentals” across its West Coast markets in July. The company attributed that assessment to growing market demand and moderating high-quality supply.
Office property owner Piedmont Realty Trust, Inc. (PDM) retained the same risk language in April and July concerning technology-related changes in office-space use, competition when renewing or re-letting space, and tenant lease terminations, defaults and contractions. Its standing warnings also cover reduced funding, layoffs and potential defaults among government tenants during shutdowns or furloughs.
Kilroy said it executed nearly 400,000 square feet of new and renewal leases during the second quarter. It reported re-leasing spreads on comparable second-generation space of 27% on a GAAP basis and 16% on a cash basis, excluding leases signed on space vacant for more than a year.