Worsenining commercial real estate market woes could spark a new banking crisis

Worries are growing that the U.S. commercial real estate market’s current woes could lead to another banking crisis.

This year, around $929 billion in outstanding commercial mortgages will mature, the Mortgage Bankers Association reports. This is a staggering amount that equates to 20 percent of the $4.7 trillion outstanding debt overall. But with higher interest rates taking a huge toll on property values in the sector and many businesses relying less on office buildings as remote and hybrid work become more popular, the stage is set for a disaster.

The National Bureau of Economic Research reports that 44 percent of office loans and 14 percent of all commercial real estate loans are currently underwater, which means their values are less than the amount still owed on the loans. Defaults could well end up being distressingly high as a result.

Columbia Business School Professor Tomasz Piskorski, who co-authored the National Bureau of Economic Research’s working paper, told the Daily Mail: “If nothing changes – if interest rates remain elevated and property values do not improve — we do view defaults at the rate of the Great Recession, and in fact even higher, as quite a possibility.”

He added that there are hundreds of banks currently on the verge of insolvency as a result of the high interest rates, and they are vulnerable to runs by depositors. For example, should the default rates on commercial real estate loans hit 10 percent – something experts believe is very likely – more than 200 American banks with aggregate assets totaling $1 trillion could see the market value of their assets dip below the value of customer deposits, which could lead to a bank run like the one that caused
Financial District by Miquel Parera is licensed under Unsplash unsplash.com

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