COMMERCIAL REAL ESTATE: RESILIENCE, RECOVERY, AND RISKS AHEAD 

Overview Commercial real estate (CRE) lending is important to the banking industry.1 FDIC-insured 

institutions collectively hold $2.7 trillion in CRE loans, more than 50 percent of the broader 

financial industry’s CRE loans. FDIC-insured institutions’ CRE loan portfolios have 

experienced the ups and downs of economic cycles, including significant credit quality 

stress during the Great Recession and challenges posed by the COVID-19 pandemic. 

The pandemic initially strained several types of CRE properties. Hotels sat empty as 

travel came to a near standstill. Foot traffic at retail properties all but ceased. Many office 

employees transitioned to remote work, and office occupancy dropped significantly. In 

contrast, the multifamily sector largely held up, as the degree to which tenants paid rent on 

time declined only slightly as the pandemic took hold. More positively, as delivery of goods 

from online shopping increased, industrial property demand strengthened. 

While CRE market conditions improved with economic recovery in 2021, some parts of 

the CRE industry may experience lasting changes. The retail sector already had been 

facing long-term growth in online shopping, suggesting less need for brick-and-mortar 

retail, and the pandemic hastened this trend. In the office sector, the pandemic spurred 

businesses to re-evaluate use of office space as they explored remote work capabilities. 

Reflecting this dynamic, forecasts suggest office vacancy rates will rise and rent growth 

will be weak in 2022. Meanwhile businesses’ use of technology to manage properties, or 

PropTech, is expected to increasingly become part of the office landscape. 

The issues facing CRE after the pandemic will be important considerations for a large share 

of the banking industry. Almost all FDIC-insured institutions are involved in CRE lending 

and many have large CRE loan portfolios. Banks have increased CRE loan exposure over the 

past decade, and while construction lending has grown only modestly, many banks have 

increased multifamily lending. The pandemic initially looked like it would significantly 

challenge banks’ CRE loan quality, but loan delinquency rates remained low through 

third quarter 2021 against the backdrop of economic rebound, stimulus support, and 

loan forbearance. 

This paper is organized into two sections. The first section analyzes the five major CRE 

property types—multifamily, industrial, lodging, retail, and office—and the conditions 

evident in each since the onset of the pandemic. We identify those property types that 

have emerged in relatively good shape (multifamily and industrial), those that are still 

challenged in one or more subcategories (lodging and retail), and the one whose future 

may be most uncertain (office). In the second section, we discuss FDIC-insured institution 

exposure to CRE loans, credit quality, and potential challenges ahead. 

I. CRE Market 

Conditions 

The Multifamily and Industrial Property Sectors Have Weathered the Pandemic 

Relatively Well 

Despite initial concerns about the prognosis for CRE, the multifamily and industrial sectors 

have recovered from the initial shock of the pandemic. By some measures, these sectors 

have exceeded pre-pandemic performance. 

Multifamily 

Heading into the pandemic, the multifamily sector’s balance of supply and demand was 

healthy, despite a large amount of new construction in recent years. In the six years 

leading up to the pandemic, the multifamily construction industry built a record amount of 

properties. From 2014 to 2019, almost 2 million multifamily units were built in the United 

States, more than double that of 2008 to 2013.2 The number of units built, referred to as 

completions, also was high when measured against the size of the existing U.S. multifamily 

1 The term “banking industry” refers to FDIC-insured institutions. 

2 CoStar, third quarter 2021 data. 

FDIC QUARTERLY 31 
2021 • Volume           15  • Number 4

market; the number of completions averaged 0.51 percent of total stock from 2014 to 2019, 

compared with only 0.25 percent in the previous six years. High levels of construction can 

lead to a rise in vacancy rates, but increased demand for multifamily-type living in the 

mid-2010s absorbed the large amount of construction. As a result, the U.S. multifamily 

vacancy rate was low and flat—it hovered near 6 percent from 2014 to 2019 (Chart 1). 

Chart 1 

Strong Demand Kept Multifamily Vacancy Rates Low for Much of the Past Decade 

Source: CoStar. 

Note: Data are quarterly figures with forecast data as of third quarter 2021. 

Share of Existing Stock 

Percent 

Vacancy Rate 

Percent 

0.0 

0.2 

0.4 

0.6 

0.8 

1.0 

1.2 

1.4 

3Q07 1Q09 3Q10 1Q12 3Q13 1Q15 3Q16 1Q18 3Q19 1Q21 3Q22 

0 

1 

2 

3 

4 

5 

6 

7 

8 

Forecast 

Absorption/Stock (Percent, Le ̃ Axis) 

Completions/Stock (Percent, Le ̃ Axis) 

Vacancy Rate (Percent, Right Axis) 

When the pandemic hit, some stress emerged in the multifamily sector, but little stress 

has lasted. The multifamily vacancy rate increased slightly early in the pandemic but 

since has declined to 4.5 percent as of third quarter 2021, the lowest rate in more than 

20 years. Demand for multifamily rental units improved significantly in 2021—the ratio 

of absorption of multifamily units to the amount of total stock has almost tripled from 

the pandemic low in 2020. Rent growth dropped from 2.4 percent in fourth quarter 2019 

to 0.2 percent in third quarter 2020, its low during the pandemic. But by third quarter 

2021, multifamily property rent growth had surpassed its average pre-pandemic level and 

was the highest among the major property types. Finally, renters’ payment performance 

weakened only modestly during the pandemic, despite labor market weakness. According 

to the Multifamily Housing Council, the share of rent payments due that were ultimately 

paid in a given month slipped only 1 percentage point nationally to 95 percent on average 

between March 2020 and September 2021.3 

The multifamily sector’s resilience likely reflects several factors. First, the health risk of 

living in close quarters may have driven people who shared houses and apartments to seek 

independent living. Second, prices of single-family homes have risen dramatically in 2021, 

which may have led home seekers to rent instead of buy a home. Finally, stimulus payments 

and aid for renters may have mitigated weakening in rental payment performance; several 

studies found that about 30 percent of renters reported reliance on government support to 

pay rent at some point during the pandemic.4 

While the multifamily property sector has been resilient, pressure may be ahead for part of 

the sector. Some properties’ cash flows could be strained by delayed rent payments as relief 

programs and forbearance efforts wane. And, as the pace of construction is expected to 

remain brisk, demand will need to be strong to keep vacancy rates stable. 

3 National Multifamily Housing Council Rent Payment Tracker, October 2021. 

4 Whitney Airgood-Obrycki, Ben Demers, Solomon Greene, Chris Herbert, Alexander Hermann, David Luberoff, and 

Sophia Wedeen, “Renters’ Responses to Financial Stress During the Pandemic,” Joint Center for Housing Studies of 

Harvard University, April 2021, https://www.jchs.harvard.edu/sites/default/files/research/files/harvard_jchs_renter_ 

responses_covid_airgood-obrycki_etal_2021.pdf. 

32 FDIC QUARTERLY 
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Industrial 

Demand for industrial space increased significantly during the pandemic. In the almost 

two years from first quarter 2020 through third quarter 2021, 582 million square feet 

of industrial space was rented (absorbed). This amount is well above the 366 million 

square feet rented in the almost two years leading up to the pandemic. As a percentage of 

the total amount of industrial space in the United States, the amount of space absorbed 

increased from 0.2 percent in first quarter 2020 to 0.9 percent in third quarter 2021, 

the highest percentage on record.5 The rise in demand reflected, in part, an increase in 

e-commerce since the start of the pandemic. E-commerce sales grew by $68 billion from 

the start of the pandemic in first quarter 2020 through second quarter 2021. This growth 

is equal to the increase in e-commerce sales in the four and a half years leading up to the 

pandemic (Chart 2).6 

Chart 2 

Demand for Industrial Properties Increased Amid a Rise in E-Commerce Sales 

Sources: U.S. Census Bureau (Federal Reserve Bank of St. Louis), CoStar. 

Note: E-commerce retail sales are seasonally adjusted quarterly figures through second quarter 2021. Net absorption are quarterly figures through 

third quarter 2021. 

E-Commerce Retail Sales 

$ Billions 

Net Absorption as a Share of Inventory 

Percent 

0 

25 

50 

75 

100 

125 

150 

175 

200 

225 

250 

275 

3Q11 3Q13 3Q15 3Q17 3Q19 3Q21 

0.0 

0.1 

0.2 

0.3 

0.4 

0.5 

0.6 

0.7 

0.8 

0.9 

1.0 

4.5 Years 

+$69 Billion 

1.25 Years 

+$68 Billion 

E-Commerce Retail Sales (Le ̃ Axis) 

Net Absorption (Right Axis) 

This increase in e-commerce boosted demand for industrial space because e-commerce 

is logistics-intensive and requires warehouse space at transportation hubs and close to 

“last-mile” population centers.7 Users of industrial space include not just e-commerce 

providers but also manufacturers, brick-and-mortar retailers, and third-party logistics 

firms. Tenants nationwide have leased a record amount of industrial space to meet 

customer demand. Amazon remains the most active tenant, both in the number of leases 

and in total space, but third-party logistics firms like DHL and FedEx have been active 

as well. Traditional food and beverage manufacturers and retailers round out the broad 

sample of industrial tenants that contributed to the record leasing pace in early 2021.8 

The rise in e-commerce and increased need for industrial space helped absorb a large 

amount of construction that has occurred in the industrial sector for much of the past 

decade. Prompted by increased demand shortly after the Great Recession, construction of 

industrial properties has been rising since 2014. From first quarter 2014 to first quarter 

2020, deliveries of new industrial space as a share of total space increased more than 

fivefold. Demand has been strong in 2021, but the large amount of industrial property 

supply in recent years bears watching. 

5 Data available from first quarter 2001. 

6 U.S. Census Bureau (Federal Reserve Bank of St. Louis). 

7 Transportation management firm Cerasis defines last-mile logistics as the final step of the delivery process from a 

distribution center or facility to the end user. 

8 CoStar, Industrial National Report, July 1, 2021. 

FDIC QUARTERLY 33 
2021 • Volume           15  • Number 4

Lodging and Retail Sectors Have Improved, but Some Subsectors Still Face Headwinds 

The pandemic immediately and severely affected the lodging and retail sectors. Hotel visits 

dropped as travel all but ceased. Retail stores were empty as shoppers stayed home. These 

two sectors have since recovered but continue to face headwinds in important subsectors. 

Lodging

The lodging sector was among the most severely affected sectors early in the pandemic. The 

U.S. hotel occupancy rate dropped sharply from more than 60 percent pre-pandemic to less 

than 25 percent in April 2020.9 In luxury hotels, the occupancy rate dropped to single digits. 

The severe decline in hotel occupancy sharply reduced hotel revenues. Hotel revenues fell 

by 80 percent in April 2020 compared with the previous year. As travel began to increase in 

late 2020, overall occupancy rates rebounded from 2020 lows and returned to pre-pandemic 

levels by mid-2021. Hotel revenues have partially recovered, but through third quarter 2021 

have yet to stabilize at pre-pandemic levels. 

Differentiation in the lodging sector is driving performance. The luxury hotel sector was 

hit hardest, and while it has largely recovered, occupancy remains below its pre-pandemic 

level (Chart 3).10 The luxury hotel sector continues to suffer from the slower return of 

corporate travel. According to CoStar, mid-week occupancy, a measure of corporate travel 

activity, was low as of mid-2021 at approximately 50 percent.11 The resumption of corporate 

travel to pre-pandemic levels is uncertain, as companies reevaluate their travel needs in 

the context of widely available teleconferencing technology. 

Chart 3 

A°er Falling Early in the Pandemic, U.S. Hotel Occupancy Nears Pre-Pandemic Levels, 

While Luxury Occupancy Lags 

Occupancy Index National Luxury 

September 2019 = 100 National Economy 

National All 140 

Source: CoStar. 

Note: Data are monthly figures. 

0 

20 

40 

60 

80 

100 

120 

Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 

In contrast, the economy hotel sector recovered more quickly, which reflected the return 

of leisure travel. Increased vaccinations and pent-up savings and vacation time supported 

a rise in leisure travel demand. The weekend occupancy rate, which reflects leisure travel, 

rebounded by mid-2021 to consistently above 70 percent.12 

While leisure travel is important, accounting for the largest share of the hotel industry’s 

room nights, group and corporate travel account for roughly two-thirds of hotel revenues.13 

Therefore, the return of corporate travel is important for a more complete recovery of the 

lodging sector. 

9 CoStar. 

10 Ibid. 

11 CoStar, Hospitality National Report, July 2, 2021. 

12 Ibid. 

13 Bank of America, Lodging Primer, September 11, 2018. 

34 FDIC QUARTERLY 
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Retail 

Trends in the retail segment reflect changes under way in the sector before the pandemic. 

The sector had already been struggling with elevated store closures and competition from 

online shopping. 

The retail sector comprises several subtypes such as malls, strip centers, and general 

retail.14 Mall space has suffered the quickest rise in vacancy since the onset of the 

pandemic. Many mall anchor tenants, such as traditional department stores, were 

struggling before the pandemic, and the complete closure of malls for several months dealt 

a blow to struggling inline stores as well.15 Elimination of all foot traffic at the nation’s 

malls contributed to a doubling of the vacancy rate from a near cycle low of 3.8 percent 

in third quarter 2017 to 7.2 percent in third quarter 2021 (Chart 4). Much of that increase 

occurred since the onset of the pandemic. 

Chart 4 

Vacancy at U.S. Malls Increased More Than Other Types of Retail 

Retail Vacancy 

Percent 

8 

3Q17 3Q19 3Q21 

General 

Source: CoStar. 

Note: Data are quarterly figures. 

Strip Center Power Center Mall Neighborhood 

Center 

0 

1 

2 

3 

4 

5 

6 

7 

Rising vacancy in some malls may indicate the degree to which property valuations may 

contract. Between February 2020 and September 2021, mall property valuations dropped 

18 percent.16 And a recent report showed that at least 49 U.S. malls have re-appraised at 

values 65 percent lower than pre-pandemic levels.17 Landlords are experimenting with 

new uses for unproductive mall space, including various forms of experiential retail such 

as fitness centers, movie theaters, and climbing gyms. More dramatic transformations 

include medical office, education, industrial, and even multifamily use. Despite the rapid 

increase in vacancy, malls were not the most-vacant retail subtype as of third quarter 2021. 

Another common suburban and rural retail subtype known as a “neighborhood center” 

ended third quarter 2021 with an average vacancy rate of 7.4 percent, the highest among 

subtypes.18 Neighborhood centers typically are anchored by a grocery store and have 

several smaller stores. While grocery stores held up relatively well through the pandemic, 

smaller ancillary stores were hard-hit by competition from e-commerce and the sharp 

14 According to CoStar, there are five major subtypes of retail properties: general, strip center, power center, mall, and 

neighborhood center. 

15 Commercial real estate consulting company VTS describes inline stores as what most people would consider smaller 

stores that fill in the space between the larger stores in malls and open-air centers. These stores compensate for the 

discounted rents provided to anchors and typically pay more per square foot. Inline stores range between 1,500 and 

5,000 square feet. 

16 Green Street Advisors Commercial Property Price Index. 

17 Bank of America Securities, “CMBS Commentary: Appraising the Situation,” November 1, 2021. 

18 Neighborhood centers have 30,000 to 100,000 square feet of space and are typically anchored by grocery stores. 

Inline stores surrounding the grocer may include apparel, sporting goods, electronics, and other personal goods and 

service stores. 

FDIC QUARTERLY 35 
2021 • Volume           15  • Number 4

drop in foot traffic as the pandemic took hold. Taken together, malls and neighborhood 

centers account for a third of all retail space. 

General retail, which typically includes freestanding and independent, nonchain retailers, 

accounts for the largest amount of retail space in the United States. It also is the fastest 

growing retail subtype; most of the retail space added in the United States over the past five 

years has been general retail. Despite adding more space than other types of retail, demand 

for general retail has kept pace with supply. As a result, the general retail vacancy rate has 

been approximately 3 percent for the past five years, less than all other types of retail space. 

Since the U.S. economy is consumption-centered, retail will continue to occupy an 

important place in the CRE industry. Different types of retail will continue to adjust to 

evolving consumer preferences, and vacancy rates, demand, and rent growth likely will 

reflect those preferences. 

The Office Sector May Face the Most Significant Challenges 

The pandemic has reduced demand for office space, possibly for the long run. Net office 

absorption in second quarter 2020 was negative for the first time in a decade; this 

means that the amount of commercial office space that was vacated or supplied by new 

construction exceeded that which was leased, or absorbed, by commercial tenants. At its 

worst during the pandemic, negative net absorption reached 0.5 percent of total inventory, 

twice the worst percentage recorded during the Great Recession.19 The drop in demand 

for office space as the pandemic emerged contributed to a significant increase in office 

vacancy. The office vacancy rate increased in almost two-thirds of U.S. office markets, and 

in each of the nation’s ten largest markets, since the start of the pandemic. As a result, the 

U.S. office vacancy rate increased from 9.7 percent in fourth quarter 2019 to 12.3 percent in 

third quarter 2021, an eight-year high (Chart 5). 

Chart 5 

Demand for Oice Space Dropped Significantly at the Onset of the COVID-19 Pandemic 

Source: CoStar. 

Note: Data are quarterly figures through third quarter 2023 with forecasted data as of third quarter 2021. 

Share of Existing Stock 

Percent 

Vacancy Rate 

Percent 

Forecast 

Absorption/Stock (Percent, Le ̃ Axis) 

Completions/Stock (Percent, Le ̃ Axis) 

Vacancy Rate (Percent, Right Axis) 

-1.0 

-0.8 

-0.5 

-0.3 

0.0 

0.3 

0.5 

0.8 

1.0 

3Q01 3Q05 3Q09 3Q13 3Q17 3Q21 

0 

2 

4 

6 

8 

10 

12 

14 

Large Office Markets

The nation’s large office markets have suffered more than smaller markets since the 

pandemic began. The average vacancy rate in the nation’s gateway markets (large, typically 

coastal markets that attract significant foreign investment) increased from 9.4 percent in 

fourth quarter 2019 to 13.0 percent in third quarter 2021.20 In contrast, the average vacancy 

19 CoStar, third quarter 2021 data. 

20 CoStar. FDIC calculations of vacancy rates for gateway and non-gateway markets are simple averages and will not tie to 

the aggregate national vacancy rates cited above.

36 FDIC QUARTERLY 
CO M M E R C I A L R E A L E STAT E : R E S I L I E N C E , R E COV E RY, A N D R I S KS A H E A D 

rate in the rest of U.S. markets increased only modestly from 5.6 percent to 6.3 percent over 

the same period. 

Gateway office markets also suffered an outsized decline in rental rates. Rent growth 

in the nation’s gateway markets had exceeded or at least equaled the U.S. average in the 

two years leading up to the pandemic. But as the pandemic took hold in 2020, office rent 

growth decelerated across the nation, and rents dropped in the gateway markets, reflecting 

avoidance of densely populated cities (Chart 6). Rent growth is expected to be low across 

U.S. markets and remain negative in gateway markets into 2022. 

Chart 6 

Rents in Gateway Oice Markets Dropped More Than Others in the COVID-19 Pandemic 

Year-Over-Year Change in Rent 

Percent 

Gateway Markets 

Non-Gateway Markets 

-5 

-4 

-3 

-2 

-1 

0 

1 

2 

3 

4 

5 

3Q18 3Q19 3Q20 3Q21 3Q22 

Forecast 

Source: CoStar. 

Note: Data are quarterly figures with forecast data as of third quarter 2021. Gateway markets include New York, Washington, DC, Boston, 

Chicago, Los Angeles, and San Francisco. 

The drop in demand also has led to an increase in sublease availability across many 

markets. Sublease availability occurs when tenants offer excess space for lease to a third 

party, typically at a discount. During the pandemic, space available through sublease 

increased, especially in large, densely populated markets such as San Francisco (Chart 7). 

Offering space for sublease became more common as the pandemic progressed into early 

2021, reflecting in part tenants’ uncertainty about returning to the office. The amount 

of space offered for sublease began to ease in second quarter 2021 but remains above 

pre-pandemic levels in some cities, which suggests vacancy issues in some office markets 

will continue. 

Chart 7 

The Amount of Oice Space Available for Sublease in Several Large Cities

Increased as the COVID-19 Pandemic Took Hold 

Source: CoStar. 

Note: Data are quarterly figures. 

Share of O ̃ice Space Available for Sublease 

Percent 

0 

1 

2 

3 

4 

5 

6 

7 

3Q17 3Q18 3Q19 3Q20 3Q21 

San Francisco, CA San Jose, CA 

New York, NY Seattle, WA 

Boston, MA Washington, DC 

Los Angeles, CA Chicago, IL 

FDIC QUARTERLY 37 
2021 • Volume           15  • Number 4

Remote Work, Return-to-Office, and Changing Office Layouts

Many companies re-evaluated their office space needs and expanded remote work during 

the pandemic. Office usage dropped significantly, and the number of employees that 

regularly occupied office buildings declined. According to one company that monitors 

office building access in several large markets, less than 15 percent of the workforce 

was going into the office in April 2020, with some markets dropping below 5 percent.21 

Foot traffic in office buildings has since improved with more than one-third of workers 

returning to offices as of October 2021, but uncertainty around new variants of the virus 

has many companies delaying their return-to-office plans to 2022.22 

Several surveys and reports reveal that a large share of companies have or plan to adopt a 

hybrid return-to-office model—a mix of office and remote work—rather than a full return 

to the office. According to PwC, more than two-thirds of company executives surveyed 

plan to implement a hybrid model.23 As companies execute new work plans, an increase in 

remote work may eventually translate into less demand for office space. 

Companies also are planning to change how they use office space. Some companies are 

redesigning space to account for fewer employees working in the office each day. Changes 

include more shared workstations, fewer permanent desks and offices, and more flexible 

space. This redesign could further dampen demand for office space, but could be partially 

offset by the need to implement social distancing among workers. Additionally, increased 

interest in flexible space also could boost demand for space provided by co-working 

companies, which struggled at the onset of the pandemic.24 

Flexibility and changes in the sector also include how various forms of PropTech will be 

implemented in CRE. PropTech is a term used to define technologically innovative products 

and business models for the CRE market (Inset Box). 

What Is PropTech? 

PropTech, short for property technology, is a term used to define technologically innovative products and business models for the CRE

market, similar to the way FinTech describes the use of technology in finance. PropTech is the use of digital innovation to address the needs

of the property industry. Below are a few examples of PropTech.

Technology Description 

“Smart” Buildings Equipping buildings with internet-enabled technology and sensors that can connect and exchange data

with each other via an internet connection. Internet-enabled devices can gather maintenance data, power

usage statistics, and information about the movement of people in a building. The information can be

studied using building management software to improve building efficiency.

Increasing the number of potential buyers by providing virtual visualizations to tour available space. This

technology was implemented quickly by many brokers at the onset of the pandemic.

Power Efficiency Building and retrofitting buildings with upgrades that reduce energy use or change the types of energy

used in construction and operation. 

Construction Technology Improving the speed, environmental efficiency, cost savings, and safety of building construction through

modeling, planning, and automation.

Appraisal Completing appraisals faster using property valuation technology based on multiple data sources.

Virtual Experiences 

Note: PropTech examples are sourced from multiple analyst reports and articles. This is not an exhaustive list of technologies nor endorsement of specific products or technology.

21 Kastle Systems LLC, Back to Work Barometer, October 2021. 

22 Morgan Stanley Research, WFH Tracker, October 2021. 

23 PwC, US Pulse Survey, August 2021. The US Pulse Survey is conducted periodically to track the sentiments and priorities 

of business executives. PwC surveyed 752 U.S. company executives in August 2021 about company workforce location plans. 

24 Co-working companies sign long-term office leases and sublease that space at a premium over current market rates. 

Co-working tenants are attracted to the flexibility of short-term obligations and the ability to avoid costs to build out 

office space. Popular co-working companies include WeWork and Regus. 

38 FDIC QUARTERLY 
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While there have been encouraging signs, such as an increase in office lease activity 

since mid-2021, hybrid return-to-office policies and reconfigured office space likely 

will contribute to changes in the office sector. Technological innovations helped make 

the transition to remote work possible, and the transition has landlords and tenants 

considering a new equilibrium level of demand for office space. Some degree of remote work 

likely will become a permanent part of the office culture. 

The Decline in CRE Property Values During the Pandemic Has Been Modest Compared 

With the Great Recession 

Economic stress hurt CRE values in the Great Recession and the pandemic, but price 

performance in each of the two recessions was different. A more modest drop in CRE 

prices in the pandemic compared with the Great Recession reflects the different natures 

of each crisis. The Great Recession followed a global crisis in financial intermediation and 

manifested in a boom and bust cycle in real estate conditions in much of the United States. 

The pandemic recession was caused by a global health crisis and manifested in economic 

shutdown and contraction, with more significant stress felt in some industries and CRE 

property types than in others. 

During the Great Recession, CRE prices dropped significantly. According to Green Street 

Advisors, prices for a compilation of all CRE property types, otherwise known as the 

all-property index, dropped 28 percent within one year of the start of the recession 

and 35 percent within two years.25 The ultimate fall in prices ranged from 31 percent in 

multifamily to 48 percent in lodging (Chart 8). The decline in CRE values accompanied 

significant financial market dislocation and credit quality stress in the banking industry, 

and took five years to recover. 

Chart 8 

Price Declines in the Great Recession Were Steep... ...But Were Less Dramatic During the COVID-19 Pandemic 

Source: Green Street Advisors. 

Note: Data are monthly figures through December 2012. 

Source: Green Street Advisors. 

Note: Data are monthly figures through September 2021. 

Indexed Price Change From the Onset of the Great Recession 

December 2007 = 100 

Indexed Price Change From the Onset of the Pandemic 

February 2020 = 100 

50 

75 

100 

125 

150 

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 

50 

75 

100 

125 

150 

Feb-20 Jun-20 Oct-20 Feb-21 Jun-21 

All Property Multifamily 

Industrial O ̃ice 

Lodging Retail 

All Property Multifamily 

Industrial O ̃ice 

Lodging Retail 

In the pandemic, CRE prices initially dropped by approximately 10 percent. However, there 

was no second leg down and many prices were flat for several months as transactions 

declined sharply. CRE prices have since recovered with prices for some property types now 

well above pre-pandemic levels. Industrial and multifamily property prices, after falling 

during the pandemic, have rebounded, with industrial property prices 42 percent above the 

pre-pandemic level and multifamily posting an 18 percent increase. Property prices in the 

retail, office, and lodging sectors have recovered more modestly. Property prices are still 

6 percent below pre-pandemic levels in retail, 5 percent in office, and 4 percent in lodging. 

25 Green Street Commercial Property Price Index. 

FDIC QUARTERLY 39 
2021 • Volume           15  • Number 4

II. CRE Lending and 

Credit Conditions 

40 FDIC QUARTERLY 

CRE prices have recovered with improvement in COVID-19 cases, business re-openings, 

and economic recovery. Investors have begun to show willingness to pay higher prices for 

some of these properties as fundamentals are stronger than expected and borrowing costs 

are relatively low. Financial market dislocation and credit quality stress have been much 

more muted than in the Great Recession, but rapid price appreciation in some CRE property 

sectors warrants monitoring. 

Banks Remain a Leading Source of CRE Lending 

As important providers of CRE financing, FDIC-insured institutions are among those 

lenders interested in CRE market dynamics in the years ahead. Banks are the largest 

participant in the commercial mortgage lending market, holding more than half of the 

nearly $5 trillion in commercial mortgages outstanding as of second quarter 2021.26 

Entities such as insurance companies, government-sponsored enterprises (GSE), and other 

issuers of commercial mortgage-backed securities (CMBS) also are active in CRE financing. 

However, FDIC-insured institutions’ market share has remained significant at near 

50 percent for more than a decade (Chart 9). 

Chart 9 

Banks Hold More CRE Loans Than All Other Market Participants Combined and

Their Market Share Has Held Steady for More Than a Decade 

Source: Federal Reserve Board, Financial Accounts of the United States, Levels of Financial Assets and Liabilities, by Sector and by Financial 

Instrument, Multifamily Residential Mortgages and Commercial Mortgages, September 23, 2021 release. 

Note: Data are quarterly figures through second quarter 2021. 

Total CRE Mortgages Held 

$ Billions 

Share of CRE Mortgages 

Percent 

0 

600 

1,200 

1,800 

2,400 

3,000 

3,600 

4,200 

4,800 

5,400 

6,000 

2005 2007 2009 2011 2013 2015 2017 2019 2021 

0 

10 

20 

30 

40 

50 

60 

70 

80 

90 

100 

All Other Holders of CRE Mortgages 

Federal, State, and Local Government Holdings 

Issuers of Asset Backed Securities (Other Than Agency/GSE) 

Insurance Industry 

Agency and GSE Debt (Including Securitized Mortgage Pools) 

Banking Industry 

Banking Industry Share of CRE Mortgages (Percent, Right Axis) 

While the ten largest FDIC-insured institutions hold nearly one-quarter of the banking 

industry’s CRE loans, participation in CRE lending is widespread among banks. More than 

98 percent of FDIC-insured institutions hold CRE loans, and CRE is the largest loan category 

at more than 40 percent of insured institutions. 

CRE lending is particularly prevalent among community banks. As noted in the FDIC’s 

December 2020 Community Banking Study, community banks play an outsized role in CRE 

lending relative to their overall market share.27 As of third quarter 2021, community banks 

held less than 12 percent of the banking industry’s assets but accounted for 29 percent of 

CRE loans. 

Besides exposure through loans, the banking industry is exposed to CRE via holdings of 

CMBS. As of third quarter 2021, banks held more than $550 billion in CMBS, most of which 

was U.S. government agency-issued or GSE-issued CMBS. Although not as prevalent as CRE 

loan exposure, more than 40 percent of banks hold some level of CMBS. 

26 Federal Reserve Board, Financial Accounts of the United States, Levels of Financial Assets and Liabilities, by Sector 

and by Financial Instrument, Multifamily Residential Mortgages and Commercial Mortgages, September 23, 2021, 

https://www.federalreserve.gov/apps/fof/FOFTables.aspx. 

27 FDIC, Community Banking Study, December 2020, https://www.fdic.gov/resources/community-banking/ 

report/2020/2020-cbi-study-full.pdf. 
CO M M E R C I A L R E A L E STAT E : R E S I L I E N C E , R E COV E RY, A N D R I S KS A H E A D 

The Composition of CRE Loan Portfolios Has Shifted Since the Previous Real Estate Cycle 

The mix of CRE loans held by the banking industry as the Great Recession took hold in the 

United States in 2008 differed from that heading into the pandemic. In 2008, construction 

and development (C&D) loans were a large part of the mix reflecting, in part, significant 

bank involvement in residential construction projects. C&D lending was particularly active 

in the Pacific, Mountain, and South Atlantic U.S. Census Divisions of the nation amid 

rapid residential construction activity.28 At that time, the volume of multifamily property 

loans was modest. But following more than a decade of growth amid rising interest in 

multifamily living, the dollar volume of multifamily property loans outstanding more than 

doubled, and multifamily loans as a share of total CRE loans increased (Chart 10). 

Chart 10 

Since the Previous Cycle’s Peak Reached in 2008, Bank CRE Lending Focus 

Has Shi ̃ed Away From C&D and Into Other Categories 

Composition of CRE ($ Billions) 

4Q-2008 3Q-2021 Other CRE $1,934 $2,695 $177 

7% Other CRE 

$70 

4% 

Source: CoStar. 

Note: Other CRE includes loans to finance commercial real estate that are not secured by real estate. Due to rounding, the loan dollar balances 

do not add up to total CRE loans. 

C&D 

$591 

30% 

Multifamily

$206 

11% 

Nonfarm 

15% 

Nonresidential 

$1,066 

Nonresidential 

55% 

C&D $402 

18% 

60% 

Multifamily

$496 

Nonfarm 

$1,619 

Despite Substantial Loan Growth, CRE Concentrations Remain Below Levels Reached in 

the Previous Cycle 

Although the total amount of CRE loans has grown, individual banks’ holdings of CRE loans 

relative to their capital levels, referred to as concentrations of CRE loans, have remained 

below the peaks reached in the Great Recession.29 High concentrations of CRE loans are 

often a subject of interest to analysts, regulators, and economists, reflecting the significant 

stress experienced by highly concentrated banks during the Great Recession and other 

economic cycles.30 

CRE loan concentrations rose steadily from 2013 to 2018, consistent with a recovering 

economy, rising CRE prices, and increasing demand for multifamily property loans. 

However, concentrations have eased in recent years because growth in capital and reserves 

has outpaced CRE loan growth. The median ratio of CRE loans to capital and allowances 

of 181 percent in third quarter 2021 is well below the peak of 214 percent reached in fourth 

quarter 2008. Further, the share of banks with elevated levels of CRE loan exposure has 

declined. Less than one-quarter of banks hold elevated CRE concentrations as of third 

quarter 2021, compared with 35 percent of banks at year-end 2008.31 

28 U.S. Census Bureau, “Census Regions and Divisions of the United States,” www2.census.gov/geo/pdfs/maps-data/ 

maps/reference/us_regdiv.pdf. 

29 “CRE concentration” in this article is shorthand for the volume of a bank’s CRE loans expressed as a percentage of its 

tier 1 capital and allowances. It is an analytical measurement and is not intended to denote examination concerns. 

30 FDIC, Crisis and Response: An FDIC History, 2008-2013, https://www.fdic.gov/bank/historical/crisis/crisis-complete.pdf. 

31 For this analysis, a bank is considered to have an elevated CRE concentration if its ratio of CRE loans to tier 1 capital 

and allowances is above 300 percent. This terminology is used only as means of identifying banks with a significant CRE 

lending focus rather than to denote examination concerns. 

FDIC QUARTERLY 41 
2021 • Volume           15  • Number 4

Nevertheless, pockets of high exposure exist, most notably in the Pacific, Middle Atlantic, 

and South Atlantic U.S. Census Bureau Divisions of the nation (map).32 The states with the 

highest median CRE loan concentration levels include California, Arizona, Washington, 

New Jersey, and Florida. 

Map 

CRE Concentrations Are Highest Along the Coasts 

Source: FDIC. 

Note: The CRE concentration ratio measures banks’ CRE loans as a percentage of tier 1 capital and allowances. Data as of September 30, 2021. ̃ 

Median CRE 

Concentration Ratio 

by Quartile (Percent) 

Less Than 156 

156 to 203 

204 to 245 

Greater Than 245 

CRE concentrations reflect many factors, including local loan demand, bank-specific 

lending expertise, and board-approved risk appetites. Another key factor is the geographic 

proximity to commercial properties. So it is understandable that CRE lending is most 

prevalent among banks headquartered in metro areas, where large amounts of CRE 

properties are located. 

Multifamily lending has become a driver for CRE loan growth among many banks, 

particularly in the Pacific, New England, and Middle Atlantic U.S. Census Bureau Divisions 

of the nation.33 For example, median multifamily loan concentrations have more than 

doubled in the past decade among banks headquartered in California, Massachusetts, 

New Jersey, and New York. Multifamily loan concentrations in these states are among the 

highest in the nation, reflecting, in part, the above-average prevalence of multifamily 

living in these states.34 Increasing concentrations of multifamily loans could influence loan 

portfolio performance going forward as multifamily loans have historically experienced 

lower delinquency and loss rates than C&D loans. 

CRE Credit Quality Was Resilient in the Pandemic, Reflecting Stimulus, Forbearance, 

and Economic Recovery 

CRE credit conditions remained relatively stable despite a sharp downturn in the U.S. 

economy in 2020. The total dollar amount of delinquent CRE loans held by FDIC-insured 

institutions increased in 2020 but has steadily improved since then. The CRE delinquency 

rate among banks increased from 0.64 percent in fourth quarter 2019 to a pandemic peak of 

1.11 percent in December 2020, and has since improved to 0.87 percent in third quarter 2021 

32 U.S. Census Bureau, “Census Regions and Divisions of the United States,” www2.census.gov/geo/pdfs/maps-data/ 

maps/reference/us_regdiv.pdf. 

33 Ibid. 

34 2018 American Community Survey, One-Year Estimates, U.S. Census Bureau, https://www.census.gov/programssurveys/acs/technical-documentation/table-and-geography-changes/2018/1-year.html. The four states mentioned in 

the text have a higher percentage of total housing with five or more housing units than the national percentage. 

42 FDIC QUARTERLY 
CO M M E R C I A L R E A L E STAT E : R E S I L I E N C E , R E COV E RY, A N D R I S KS A H E A D 

(Chart 11). Additionally, net loan loss rates have been negligible among CRE loans and are 

comparable to pre-pandemic levels. 

Chart 11 

CRE Delinquency Rates Remain Historically Low 

Source: FDIC. 

Note: Data are quarterly figures through third quarter 2021. Other CRE loans include loans to finance commercial properties that are not secured 

by real estate. 

Past-Due and Nonaccrual Loans to Total Loans by CRE Loan Type 

Percent 

0 

5 

10 

15 

20 

25 

1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 

Recession 

C&D 

Multifamily 

Nonfarm Nonresidential 

Other CRE 

CRE (All Types) 

The resilience of CRE credit quality among FDIC-insured institutions reflects several 

factors. First, government stimulus, including economic relief programs, grants, 

and tax breaks, helped borrowers maintain loan payments.35 For example, increased 

unemployment benefits helped apartment tenants pay rent. And, funds allocated under 

the Restaurant Revitalization Fund and the Small Business Administration’s Paycheck 

Protection Program were specifically designed to help businesses affected by the pandemic 

to pay operational expenses, including rent. 

Second, banks offered forbearance plans to borrowers to provide temporary relief in certain 

instances. Bank-offered forbearance plans included short-term loan modifications such as 

payment deferrals, fee waivers, extension of repayment terms, or other delays in payment 

to borrowers hurt by the pandemic.36 

Finally, broader economic circumstances lessened the pandemic’s effect on CRE. For 

instance, historically low interest rates played a role in limiting property value declines 

and kept interest payments on loans down. Also, the speed of economic rebound helped 

job growth and consumer spending return, which helped businesses recover. Other 

factors helped parts of CRE as well—the sharp rise in home prices may have spurred some 

would-be buyers to rent apartments, and the boom in e-commerce drove demand for 

industrial space. 

But there have been signs of credit stress in CRE outside of bank-reported delinquencies. 

CMBS delinquency rates among hotel and retail properties hit double digits in 2020, 

surpassing peak delinquency rates in the previous cycle. CMBS delinquency rates have 

improved in 2021 but remain above pre-pandemic levels. CMBS backed by industrial, 

multifamily, and office properties had only limited increases in delinquency rates, which 

helped moderate the effect on overall CMBS performance. 

35 Relief programs for individuals include Economic Impact Payments, federal unemployment compensation, and 

emergency rental assistance. Tax breaks for individuals include the Child Tax Credit. Relief programs for businesses 

include the Emergency Capital Investment Program, the Paycheck Protection Program, the Small Business Lending 

Fund, the Community Development Financial Institutions Fund, and others. Tax breaks for business include Payroll 

Tax Deferral, the Employee Retention Credit, and the Paid Leave Credit. The Restaurant Revitalization Fund and the 

Shuttered Venues Grant are other examples of funds or grants provided to businesses affected by the pandemic. More 

information on economic relief is available at https://home.treasury.gov/policy-issues/coronavirus. 

36 FDIC, “Revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With 

Customers Affected by the Coronavirus,” Financial Institution Letter 36-2020, April 7, 2020, https://www.fdic.gov/news/ 

financial-institution-letters/2020/fil20036.html. 

FDIC QUARTERLY 43 
2021 • Volume           15  • Number 4

Challenges Facing the CRE Industry and the Lending Landscape 

CRE has been resilient amid the pandemic, but challenges remain. First, loan performance 

could weaken as stimulus benefits sunset and loan modifications wind down. Stimulus 

programs such as the Paycheck Protection Program and supplemental unemployment 

benefits have ended, and many loans have exited loan modification agreements or will soon. 

Second, banks are facing low loan yields. Loan yields have declined in recent years amid 

the drop in interest rates and reached a record low in third quarter 2021.37 Low loan yields 

contribute to margin compression and may complicate risk/reward lending decisions, as 

banks seek to deploy the record levels of deposits that flowed into banks since the start of 

the pandemic. 

Third, lending decisions likely will need to navigate uncertain CRE conditions for some 

time. Rising office vacancy rates and elevated sublease activity indicate waning demand, 

but the full effects of changing dynamics in the sector are still developing. Office property 

demand may take time to stabilize as tenants navigate remote work decisions and adjust 

how much space they need. A slow return to densely populated urban office centers could 

reduce the desirability of nearby multifamily and retail space that caters to those office 

employees. Similarly, the extent to which business travel returns could have lasting effects 

on certain hotel properties. 

Last, pandemic-related stress continues to hamper economic conditions. Labor market 

weakness and inflation concerns may continue to pressure borrowers’ ability to repay 

loans. The threat of new COVID variants and the pressure of combating a pandemic 

may continue for some time. These and other potential threats remain, but CRE so far 

has weathered some of the most severe economic conditions in recent history and has 

been resilient. 

Authors: 

Jeffrey A. Ayres, PhD 

Senior Financial Analyst 

Division of Insurance and Research 

Robert M. DiChiara 

Regional Manager 

Division of Insurance and Research 

Alexander J. G. Gilchrist 

Regional Economist 

Division of Insurance and Research 

James K. Presley-Nelson 

Senior Financial Analyst 

Division of Insurance and Research 

Stephen H. Simpson 

Senior Financial Analyst 

Division of Insurance and Research 

The authors thank Margaret M. Hanrahan and Olayemi F. Jegede for their contributions to this article. 

37 Loan interest income is aggregated among all nonresidential real estate loans, so yields calculated include agricultural 

real estate loans. 

44 FDIC QUARTERLY