Concentrations in commercial real estate lending

This Economic Letter examines the rise in commercial real estate (CRE) lending concentration at commercial banks and the performance of CRE loans since the early 1990s. The analysis shows that while concentration in CRE lending has increased substantially at many banks, for those banks with CRE concentrations, the subsequent performance of their CRE loan portfolios, as well as their overall loan portfolios, has not been notably different from other banks. In terms of capital, CRE-concentrated banks have slightly lower capital ratios, although they also have exhibited higher capital growth rates. On balance, the evidence suggests that, in what has been a relatively benign economic environment, banks focusing on CRE lending have been as effective as other banks in managing their lending risks. However, more analysis is needed to understand the differences in levels of capitalization.