Few industries have been more affected by the coronavirus pandemic and its aftermath than commercial real estate.
Inflation, rising interest rates, and continued work-from-home orders have hurt the industry, and U.S. financial regulators have warned that commercial real estate loans are widely held by banks, insurance companies, and other financial institutions. is being carefully monitored. institution.
The Financial Stability Oversight Council released its 2023 annual report on Thursday, naming commercial real estate first on its list of financial risks to the U.S. economy.
FSOC was established in response to the 2008 financial crisis to identify potential risks to U.S. financial stability and promote market discipline. It is comprised of the heads of major U.S. financial regulators and is chaired by Treasury Secretary Janet Yellen.
The report found that total commercial real estate loans in the second quarter of 2023 reached nearly $6 trillion, about half of which were owned by U.S. banks, and that a “significant amount” of these loans will be transferred within the next few years. He pointed out that it will expire in 2020.
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Regulators are concerned that rising office vacancy rates could entrench a vicious cycle in which borrowers are unable to repay their debts, resulting in difficult sales that affect the value of nearby properties. The lack of traffic in some business districts also has the compounding effect of reducing demand for restaurants and retail stores within the business district.
Given that commercial real estate loans are the largest lending category for nearly half of U.S. banks, and a quarter have a large portfolio of commercial real estate loans relative to their capital reserves, banking watchdogs will also reduce lending to all sectors of the economy, worrying that problems in this sector could make banks worse off.
“Interlinkages between financial intermediaries operating in the commercial real estate market, such as banks, insurance companies, REITs, and private lenders, can amplify financial stress in this sector,” the report states. There is.
Vacancy rates for large multifamily properties are also currently rising, with real estate values in the sector down 4% from pre-pandemic levels and 16% year-on-year, the report said.
More pain lies ahead in this sector, particularly in the US Sunbelt markets of Texas, Florida and Arizona. There, new properties continue to be built rapidly even as rent growth has slowed or even begun to fall.
The Federal Reserve’s Financial Stability Report in May also cited commercial real estate as a significant risk to the economy and banking system, and a study released last month by the St. Louis Fed found that the sector is suffering as prices fall and the financial system declines. It has been shown that leverage is increasing. Very few deals have been restructured.
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The study shows that smaller banks tend to have greater exposure to commercial real estate debt, which could indicate distress in the local banking sector.
KRE, as exposed by the failures of Silicon Valley Bank and Signature Bank of New York earlier this year, could be here to stay.
Meanwhile, financial regulators are now acutely aware, following the SVB bailout, that problems with small banks can pose broader risks to financial stability.
“Risks from potential economic recession” [commercial real estate sector] Researchers at the St. Louis Fed are concentrated in small banks and not in large bank holding companies, which are commonly perceived as too big to fail.”
Furthermore, as the 2007-2008 financial crisis showed, a large wave of failures of even small financial institutions can cause significant turmoil in financial markets, which can later spill over into the real economy. It’s sexual,” he added.
