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Another banking crisis is looming, said The Economist. "A combination of nasty events" has produced a "hellish-perfect-dumpster-fire-storm" for investors in commercial real estate, landlords, and their financiers. Building owners are slowly accepting the idea that, thanks to remote and hybrid work, their office properties are "unlikely to fill up again" and are therefore worth "only half what they paid for them." In the extreme case of San Francisco, office vacancies have hit 33 percent, more than eight times the pre-pandemic level. The combination of plummeting occupancy and higher interest rates will make refinancing tougher for property owners, who may simply hand back the keys. Banks could "end up with lots of offices" to try to sell at deep discounts. "This will bring back memories of the global financial crisis."
Almost $1.5 trillion in U.S. commercial debt will need to be renegotiated in the next 24 months, according to Morgan Stanley, said Alena Botros in Fortune. The recent banking crisis will only "exacerbate the existing lack of liquidity" as banks tighten lending standards. Interest rates are 450 basis points higher than they were a year ago. Delinquencies could cut commercial real estate values by 40 percent, "worse than in the Great Financial Crisis." Unfortunately, "the wall of debt is set to get worse," said Neil Callanan in Bloomberg. The number of loans coming due will continue to rise over the next four years, peaking at $550 billion in 2027. "Banks also own more than half of the commercial mortgage-backed securities," bonds that are backed by commercial mortgages. Prices for those bonds have dropped precipitously.
Smaller banks have the most to lose, said Jeff Stein in The Washington Post. Banks with less than $250 billion in assets account for roughly 80 percent of commercial real estate lending, according to Goldman Sachs. And at least 400 midsize U.S. banks "have three times as many loans for commercial real estate as they do safer investments." "The nightmare scenario would come" if leases don't get renewed, forcing down property values, which turn into big losses on smaller banks' balance sheets. "That, in turn, could make depositors and investors doubt banks' financial stability — potentially leading to the same kind of runs that brought down Silicon Valley Bank and Signature" last month. Will the government rescue hundreds of failing banks?
"The office sector is only one part of commercial real estate, albeit a large one," said Tim Mullaney at CNBC. Office vacancies have been a problem for two years, but banks haven't succumbed to commercial delinquencies yet. That's because other sectors of commercial real estate are in very good shape. "Vacancy rates in warehouse and industrial space nationally are low," hotels are booming, and retail stores are also hanging on to their brick-and-mortar footprints relatively well. Before you panic about banks, consider this: At Wells Fargo, the nation's largest commercial real estate lender, write-offs on commercial loans were just "one hundredth of 1 percent of the bank's portfolio" last year. Consumer loan write-offs were 39 times higher.
This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.