Investors could be misunderstanding commercial real estate risk and overlooking potential opportunities.

The threat of a wave of maturing commercial real estate loans has been looming over investors, raising concerns about potential defaults as borrowers face higher debt payments due to rising interest rates. Wall of maturity data show that about 30% of outstanding CRE debt is set to mature between 2024 and 2026, leading to fears that property owners may hand back the keys and walk away due to untenable economics. This heightened default risk, coupled with the impact of higher interest rates, has weighed heavily on bank stocks, with the KBW Bank Index and SPDR S & P Regional Banking ETF underperforming the S & P 500 Index. However, troubled loans are currently contained, with only 1.23% of outstanding CRE loans considered at risk, according to CoStar.

Investors have been particularly concerned about regional bank stocks that have commercial real estate exposure exceeding 300% of their total equity, a level deemed excessive by the Federal Reserve. However, Stephens analysts have found that banks with more than $250 billion in assets are experiencing an acceleration of past due loans, despite having lower CRE concentrations. This trend may reflect exposure to large, high-profile office properties in major metropolitan areas, which have been hard hit by the pandemic and changing work dynamics. The Kansas City Fed also highlighted that the risk of default increases with the size of the property, suggesting that community banks might be less risky than their CRE exposure figures would indicate.

Analysts recommend that investors consider a more granular look at the types of loans a bank holds, as well as other metrics such as average loan size and exposure to interest rates. While larger banks may face challenges due to their exposure to high-profile properties in major metropolitan areas, community banks with smaller loan sizes may be less risky. Some top stock picks in the current environment include NBT Bancorp, Webster Financial, and Valley National Bancorp. These banks have strong management teams and may present compelling opportunities despite the challenging market conditions.

For larger banks, sentiment may be improving as fundamentals show signs of potential turnaround, including a bounce in investment banking business and net interest income. Providence-based Citizens Financial Group and Cleveland’s KeyCorp are among the banks that analysts have favorable ratings on, as they show potential for growth even in the face of high interest rates and concerns about CRE exposure. Despite challenges facing the banking sector, these banks may present opportunities for investors looking for defensive and offensive plays in the market. As the market continues to navigate uncertainties related to CRE loans and interest rates, investors may find value in carefully evaluating banks based on a range of metrics beyond just CRE exposure.