Officials from the White House, the Treasury Department, and the Federal Reserve, are huddling over risks to the banking systems from the $20 trillion market for commercial real estate. Analysts told the Washington Post that this market could be heading for a crash over the next two years thanks to higher interest rates and continued softness in demand after Covid shutdowns.
One reason that this market is getting extra attention is that regional banks, already under pressure from problems at Signature and First Republic banks, play a big role in this market for loans to commercial real estate.
Any bursting of the bubble in the commercial real estate market is, however, likely to take place in slow motion since real estate leases, the security for commercial real estate loans, run for several years so any cancellations are likely to stretch over a longer period. Still, if the sector does go into crisis, analyses say that commercial real estate could contract in value by as much as 30%. On March 7, KBW, a financial services firm, released a report that forecast a more than 30% decline in the value of office property over the next two years. Prices would bottom out by the end of 2024, the report said, with the brunt of the losses realized this year and the next.
Of the regional banks sucked into the crisis so far, Signature Bank had the 10th-largest portfolio of commercial real estate loans in the United States. First Republic Bank has the ninth-largest, the firm found.
Although commercial real estate delinquencies ticked up by 10 basis points last quarter, they remain low by historic standards, according to S%P Global Market Intelligence. But at least 400 U.S. banks with at least $100 billion in total assets at the end of last year have three times as many loans for commercial real estate as they do safer investments, S&P found. Bigger banks also have substantial, if smaller, exposure.
The first place any problems may show up is in the earning reports from regional banks in April. A rise in delinquencies or an increase in reserves against loan losses might be prudent but those moves would still make financial markets nervous.
And in the meanwhile, what they don’t know will continue to make the stock market nervous about bank stocks.