(Bloomberg) -- A key US banking regulator said it will be taking a closer look at growing bank-held commercial real estate loans, citing macroeconomic volatility. 

The Federal Deposit Insurance Corp. announced in a report on Wednesday that its next test cycle will focus on “newer CRE credits, credits within stressed sub-categories and geographies, and credits with payments vulnerable to rising rates and rising costs.” 

The move comes afer banks increased their exposure to CRE lending, with real estate now representing the largest loan portfolio type for almost half of all banks, said the FDIC. Bank-held CRE debt ballooned to $2.7 trillion at the end of 2021, from $1.9 trillion in 2008. The regulator is concerned about the exposure, given the uncertainty around the fastest inflation in 40 years, rising interest rates, supply chain challenges, as well as COVID-19’s long-term impact on labor and commerce.

“CRE loan concentrations add dimensions of risk that necessitate continued attention from banks and their regulators, especially as the pandemic lingers and uncertainties remain,” wrote the agency.

The FDIC will also examine banks’ CRE lending performances and risk management processes since the start of the pandemic, having found instances of shortfalls.

Commercial real estate became a focus during the pandemic, when offices emptied and retail moved online. But the sector has somewhat recovered since then, becoming a hedge against inflation as property values rise, Tracy Chen, portfolio manager at Brandywine Global Investment, said in a phone interview. 

However, “there are some challenges in pockets of CRE debt, such as offices and retails,” she said.

Delinquencies in offices within commercial mortgage-backed securities are up 0.2% year to date, according to an Aug. 2 Barclays note. If market conditions deteriorate any further, the same properties could take a hit, adding further pressure on banks holding the debt.

“Within the office subsector, we expect some tick up in delinquencies as companies start downsizing their real estate footprint,” said Anuj Jain, commercial real estate debt analyst at Barclays. “But our view is that if we go into a mild recession, the overall impact on CRE will be limited.”

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