• Small banks hold a disproportionate share of commercial real estate loans compared to all other loans, according to Federal Reserve data.
• Rising commercial real estate vacancy rates after the COVID-19 pandemic are suppressing demand in the sector, while high interest rates This increases costs and increases the risk of developers defaulting on their debts.
• “My view is that the commercial real estate market is a slow-moving train wreck that will have a huge negative impact on local banks,” said Desmond Luckman, a senior fellow at the American Enterprise Institute. ” he told DCNF. “This could derail the economic recovery and force the Federal Reserve to significantly cut interest rates.”

Experts told the Daily Caller News Foundation that small and medium-sized banks could face a new crisis due to large investments in the commercial real estate sector, which is struggling under the weight of lack of demand and high interest rates. He said there is.

Smaller banks outside the top 25 by assets own about 70% of commercial real estate loans, although they only hold 36% of all loans. according to Based on Federal Reserve data reviewed by DCNF. Experts told DCNF that small banks' exposure to the struggling commercial real estate sector poses significant risks in terms of triggering another banking crisis. These banks rely on revenue from developers who have taken on debt, which they may not be able to repay. (Related: China's real estate collapse impacts troubled American sector)

“My view is that the commercial real estate market is a slow-moving train wreck that will have a huge negative impact on local banks,” said Desmond Luckman, a senior fellow at the American Enterprise Institute. ” he told DCNF. “The result could derail the economic recovery and force the Federal Reserve to sharply cut interest rates. A fundamental problem in the commercial real estate market is that people spend at least part of the week at home rather than in the office. Record-high vacancy rates caused by the increased post-COVID-19 trend to work.”

Roughly $2.81 trillion in commercial real estate loans are due by 2028, and businesses will have to decide whether to pay them off in full or refinance at higher interest rates. A total of $544.3 billion in commercial real estate loans come due in 2023, the largest amount on record, prompting many developers to refinance under the current expensive credit climate.

Interest rates on commercial real estate loans have been rising due to the Federal Reserve's increase in the federal funds rate, which currently ranges from 5.25% to 5.50%. Developers may soon get some relief after the Federal Reserve said it expects the federal funds rate to be cut to around 4.6% this year.

Vacancy rates for commercial real estate are skyrocketing due to the promotion of working from home due to the coronavirus pandemic and a decrease in demand due to online shopping. Office vacancy rates saw the biggest increase, rising from around 13% in 2019 to 20% in Q3 2023.

“Right now, real estate prices are expected to fall by about 40%,” Luckman told DCNF. “That means about $1.2 trillion in value will evaporate in a $3 trillion market. This, along with high interest rates, means real estate developers will have to pay $500 billion in annual real estate loans due over the next two years. It will be difficult for banks to carry forward their debts. That could lead to a spate of defaults on real estate loans. The entire banking system will be hit hard, but local banks will be the ones hit the hardest.”

Delinquencies on commercial mortgage-backed securities are projected to rise from 2.25% in November 2023 to 4.5% in 2024 and 2.9% in 2025. according to to Fitch ratings.

A series of bank failures began in early 2023, after depositors panicked and caused a bank run, leading to the bank's failure and takeover by Federal Reserve, the now-defunct Silicon Valley Bank ( More banks may follow in SVB's footsteps. Insurance Company (FDIC). First Republic Bank and Signature Bank followed SVB's lead, as fleeing depositors also caused failures.

“Commercial real estate is fine.” pic.twitter.com/NIkLMchLP0

— MacroEdge (@MacroEdgeRes) February 6, 2024

Peter St. Onge, an economics researcher at the Heritage Foundation, said, “New York Community Bank was on the verge of death, and it seems like it was being saved by deposit transfers from other banks.'' He spoke to DCNF about sex. Bank failure. “But there is definitely about $300 billion in funding. [commercial real estate] Loans to local governments account for approximately 30% of the balance sheet. Many have lost more than half their value. So, definitely, it's life-threatening. ”

New York Community Bank (NYCB), which acquired Signature after its bankruptcy, recently released a dismal earnings report showing losses related to its huge exposure to commercial real estate. according to In the New York Times. As a result, the bank's stock price fell by nearly two-thirds as investors decided it was a risky bet.

Some economists are more optimistic about the health of the banking system, with Norbert Michel, vice president and director of the Center for Finance and Financial Alternatives at the Cato Institute, telling DCNF that the banking sector's problems are overblown. .

“There is no particular reason to think that the banking system is not adequately capitalized,” Michel told DCNF. “That said, there is no way to know for sure whether any part of the economy will experience a shock. There is also no particular reason to focus on real estate now. Real estate shocks have been causing problems for the banking sector for over a century. The good news is that experts predict that 10 of the last two bank failures were caused by real estate problems.

According to the NYT, the number of NYCB depositors has remained largely stable since the announcement, avoiding the possibility of panic or a bank run. While many depositors may have fled on the news, funds from other lenders may have shored up the bank's books.

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