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Fed to keep close tabs on commercial real estate lenders

by Andrew Moreau | May 21, 2023 at 2:32 a.m.

The Federal Reserve Bank, while emphasizing the U.S. banking system is stable after three failures in the first quarter, put lenders on notice it is intensifying review efforts and zooming in on the weakened commercial real estate segment.

Three large U.S. banks collapsed in the quarter, leading to more scrutiny of liquidity, chiefly deposits, across the banking system.

In its semiannual Supervision and Regulation Report, released last week, the Fed emphasized that the "U.S. banking system is sound and resilient, with strong capital and liquidity." The review details the Fed's supervisory and regulatory policies and actions, and current banking conditions.

Volatility in the sector has calmed, with deposits stabilizing at the end of the first quarter, though the Fed noted it would intensify monitoring of lenders, carefully assessing their ability to respond to risks and potential pitfalls.

In particular, soaring interest rates and declining office occupancy rates are eroding confidence in the commercial real estate (CRE) segment. "Delinquency rates for some loan segments have started to increase from the low levels seen over the past several years," the Fed's board of governors wrote, listing commercial real estate lending as a hotspot.

Office real estate is drawing special attention as occupancy rates drop -- influenced by work-from-home models -- and pressure bank balance sheets. Lending in the segment could stagnate. "That stress could create a negative feedback loop where CRE declines strain bank balance sheets causing banks to pull back further on CRE lending causing further price declines and so on," the report noted.

Banks are responding by setting aside more money to cover loan losses and regulators are stepping up monitoring to spotlight risky behavior.

Banking analysts at Stephens Inc. released an industry note Thursday that also outlines the heightened concern with CRE loans. Major U.S. metropolitan areas have an office vacancy rate of 17.8%, the highest in 30 years and up sharply from 12.2% three years ago, Stephens reported.

The problem could be around for a while. "For the remainder of 2023 and likely into 2024, we believe bank investors should brace for negative office building headlines and negative credit migration within bank office portfolios," the analysts wrote.

Another challenge for the office sector: Moody's Analytics reported last week that commercial real estate prices in the quarter sagged for the first time in more than a decade, led by declines in office buildings and multifamily projects.

CRE loans may lose momentum but they're not drying up, according to the Moody's review. "An analysis extending through 2024 reveals lending will continue among various CRE lending sources including banks, but under the pressure of much higher interest rates and tighter underwriting standards," it said.

Moody's Analytics is a primary source banks use to monitor economic conditions and evaluate industry risks to help guide business decisions.

Stephens' note revealed the exposure Arkansas' three publicly traded banks have to the CRE office market. The analysis showed the lenders -- Bank OZK, Home BancShares and Simmons First -- to be in solid shape compared with peers in the region.

Southwest banks as a region have a 7% median rate of exposure to the CRE office segment. Simmons was at 6%, Home at 7% and Bank OZK at 8%.

CRE vulnerability is not a new issue. The Stephens note said office-sector lending "has been the primary credit concern for bankers and investors since fall of 2021."

The Fed reiterated that the financial sector is stable and that capital levels remain well above regulatory minimums.


The Venture Center of Little Rock is bringing back its VenCent Fintech Summit, an event that connects bankers and global financial service providers with entrepreneurs and companies in the financial technology space.

The 2023 event, held for the second consecutive year, is scheduled for Aug. 14-15 in Little Rock.

It will feature a speed networking breakout option for bankers and fintech innovators to make intentional connections in real time. The rotating one-on-one sessions will accommodate targeted pitches from fintechs to help secure new partnerships.

The summit will provide attendees from the banking sector with access to the latest advances in fintech as well as insight from financial policymakers.

Last year's summit attracted more than 135 U.S. banks and more than 125 global fintech companies.

"We've programmed VenCent to provide true value to our attendees," said Arthur Orduna, the executive director of The Venture Center. "We're putting bankers and fintechs at the center of the experience so they can have important, fact-finding conversations in a very finite amount of time."

Go to for more information and registration.


Alternative-energy advocates can learn more about fund-raising to support their businesses at a daylong seminar on June 15 in Fayetteville.

The event will connect advanced-energy stakeholders with potential research partners and funding opportunities and is scheduled for the Arkansas Research and Technology Park at 535 W. Research Center Blvd. on the University of Arkansas campus.

Under the heading "Energy Innovation in Arkansas," the 9:30 a.m. session will offer tips to researchers and entrepreneurs seeking federal non-dilutive funding to bring energy technologies to market.

The afternoon session will offer an industry overview related to state and federal funding opportunities, private sector priorities, alternative energy activities and industry needs in the future.

Attendance is free and registration is open through June 1. Sessions are sponsored by the university, the Arkansas Advanced Energy Association and the Arkansas Small Business and Technology Development Center. More information is available at

The event "provides an opportunity to drive innovation and collaboration with our state's energy industry, entrepreneurial ecosystem and researchers," said Mike Malone, vice chancellor for economic development at the university. "We have the resources and know-how in Arkansas to make a significant positive impact in this sector."

Participants also can learn more about industry innovations through a showcase highlighting energy projects at the university and with entrepreneurs at technology park.

Column ideas or recommendations? Thoughts or musings that need pursuing? Contact me at [email protected] or at (501) 378-3567.

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