The decline of commercial real estate is not a one-time event. Not only will landlords suffer losses from canceled or expiring leases, but the banking industry could also be hit hard as buildings sit vacant and lose value.
In fact, Federal Reserve Chairman Jerome Powell is concerned that the downturn in the commercial real estate market is starting to affect banks.
“This feels like an issue that we're going to be grappling with for years,” he told CBS. 60 minutes “This is a pretty big problem,” he said in an interview Sunday, but added that it's also a “manageable problem” that is likely to impact smaller and regional banks.
But this is the second time in the past year that Powell has warned about the impact of the commercial real estate sector on small and medium-sized regional banks. In June 2023, a few months after Mr. Powell took extraordinary steps to prevent the spread of infection in the banking industry following the failure of Silicon Valley Bank, then the second-largest in U.S. history, Mr. He said he is keeping a close eye on real estate and its impact on banking. system.
“As long as it's well diversified, the system can suffer losses,” Powell told reporters. “So we're very aware of that and we're monitoring it closely.”
office space issues
In the aftermath of the pandemic, many companies have adopted fully remote work or hybrid models, resulting in companies large and small significantly reducing their office footprints. Take the examples of Fannie Mae and Wells Fargo. Both companies recently relinquished hundreds of thousands of square feet of office space in Washington, D.C., and Raleigh, North Carolina, respectively.
This is just one example of a reeling commercial real estate sector, with data from Cushman & Wakefield showing there could be 1 billion square feet of unused office space by the start of the new decade. . And the situation is likely to worsen as loans mature and more leases come to an end.
“Current weaknesses in CRE real estate performance are highly concentrated in office real estate, particularly properties with short loan maturities and high lease rollovers,” said Kevin Fagan, head of CRE economic analysis at Moody's Analytics. he said. luck. “With approximately $325 billion of loans nearing maturity, some loans will have trouble refinancing into a high-interest environment, which in some cases will slow demand for CRE space.”
After the 2009 global financial crisis, many commercial real estate developers and investors, with interest rates low, took out large loans with maturities of 10 to 20 years, with repayments due within the next year or so. Michael Imerman explains. He is an assistant professor at the Paul Merage School of Business at the University of California, Irvine, specializing in banking and real estate.
“While some of these loans are from large banks; [such as] JP Morgan, Bank of America, Wells Fargo, [and] Citi, a lot of this is the primary business of local banks,” Immerman said. luck. This is why “I remain very concerned about the crisis in the local banking industry.”
Will the downfall of CRE spell doom for all banks?
Economists, bank executives and real estate experts are divided on this point. Seamus Nally, chief executive of property management software company TurboTenant, said the commercial property market was “having a huge impact on banks, especially regional banks”. That's because homeowners and local businesses are more likely to seek financing from small banks than from financial institutions, “so the rise and fall of the real estate market has a greater impact on these small banks.”
He expects “a few” local banks to begin closing this year, but not a large number.
“The real estate market has been very tense in recent years, but is expected to ease only slightly this year,” Nally said. “We're seeing big banks start acquiring smaller banks that can't serve the market.”
But Grant Cardone, founder and CEO of real estate investment firm Cardone Capital, said the Fed was “covering up” the extent of the problems in and around local and commercial banks. He said the problem “will spread to hundreds of banks across the country.” Americans will have fewer options when it comes to local banks. ”
“Banks are collapsing at the fastest rate in the history of this country,” Cardone said. luck. “This is because Americans trust online banking, making local banks and national chains such as Wells Fargo, Bank of America, and Citi obsolete in commercial real estate, with tens of thousands of locations across the country. It will have a further negative impact on value.”
Will there be as many bank failures as there were in 2008 during the global financial crisis?
Mr. Cardon is more pessimistic about the prospects for bank closures and a downturn in commercial real estate, while Mr. Powell has a less bleak outlook.
“There doesn't seem to be any predisposition to a crisis like we've seen from time to time in the past, such as the global financial crisis,” he said. 60 minutes interview. “I'm sure some banks will have to close or merge because of this,” he said, but he thinks it will be the smaller banks that will suffer the losses.
“This is a long-term change in downtown real estate use,” Powell said. “The result will be a loss for owners and lenders, but it should be manageable.”
Tom Collins, head of the national commercial banking practice at consulting firm West Monroe Partners, agrees that some commercial real estate will default, but that's what Cardon expects. It's probably not a few hundred. “Unless something major changes'' like what happened in 2008.
“While local banks are undoubtedly 'ground zero' for issues related to the commercial real estate market, large banks can be affected as well,” Collins said. luck. “Although there are some alarm bells ringing among local banks regarding the commercial real estate sector, I don't think it's time to panic.”
