Chicago’s Small Banks Exposed to Commercial Real Estate Woes

Small banks in the Chicago area are disproportionately exposed to the risks posed by a struggling commercial real estate sector, a situation likely to worsen this year despite anticipated economic improvements.

Rising interest rates over recent years have exacerbated the strain, increasing costs for borrowers seeking to refinance loans, Crain’s reported.

“For the smaller banks in the Chicago area, the commercial real estate loans are, relative to their total loan portfolio, more than twice that of the larger banks,” Terry McEvoy, banking industry analyst with financial services firm Stephens, told the outlet. “That is just by nature of being a community bank and the type of customers you have.”

Lingering uncertainties, including shifting remote-work patterns and workers’ demands for high-quality amenities, have further dampened prospects for downtown property owners, raising doubts about their ability to meet loan obligations.

Data from Stephens reveals that the 20 local banks with the highest commercial real estate loan concentrations, ranging from $107 million to $2.64 billion in assets, average 53.6 percent of their loans in this sector. In contrast, the largest Chicago-area banks have 19 percent of their loan portfolio devoted to commercial real estate.

Despite efforts to diversify portfolios, even major banks like Old Second Bancorp are feeling pressure. Nonperforming loans have increased, driven by stress in office and assisted living properties.

Concerns extend beyond individual institutions. Looming loan maturities originated during the low-interest-rate environment of 2020-21 pose a significant challenge, forcing borrowers to confront higher rates or default.

Regulators, including Treasury Secretary Janet Yellen, are monitoring the situation closely, urging banks to bolster loan-loss reserves and liquidity levels. Derrick Barker, CEO of Nectar, warns that many borrowers may face a harsh reality as overly optimistic assumptions collide with market realities, the outlet reported.

The slowdown in commercial real estate activity throughout 2023 serves as a precursor to the challenges ahead. Barker emphasizes that even if interest rates decrease slightly, they won’t be sufficient to rescue those who made aggressive assumptions.

—Quinn Donoghue