And its downturn could lead to bankruptcy for up to 385 American banks, most of them smaller, regional ones, according to a new report by the National Bureau of Economic Research (NBER). That’s because more investors are expected to default on their commercial real estate loans, thanks to continued high interest rates and declining property values. Those defaults could trigger uninsured depositors to run on the banks—like they did with Silicon Valley Bank in March.
Rising default rates on commercial real estate loans
The new normal of hybrid work has hit the commercial real estate sector particularly hard. Demand for office space keeps plummeting, and vacancy rates reached about 20% in the third quarter. US commercial real estate values have fallen by some 20% between early 2022 and late 2023, and they’ll probably drop another 5% to 15% next year, according to global real estate firm CBRE.
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High interest rates mean investors will have a hard time refinancing their commercial real estate (CRE)loans, about 40% of which will reach maturity between 2023 and 2025, the NBER study reports. Lower property values, increased interest rates, and declining office demand could lead more firms to default on theirloans in the next few years.
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“If interest rates remain elevated and property values do not recover, default rates on CRE loans could reach levels comparable to or surpassing those of the Great Recession,” one of the study’s authors, Tomasz Piskorski, told Quartz.
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The report (pdf) estimates that investors could default on between 10% and 20% of CRE loans, which make up about a quarter of all assets held by the average US bank.
Trouble for US banks
For uninsured depositors, that could prompt a run on the banks. Because higher interest rates have reduced the value of banks’ assets, they don’t have as much capital to repay their debts. As a result,more banks could go bankrupt.
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While the report doesn’t include a time element, “once the system becomes unstable (like in March 2023) things can happen quite quickly,” Piskorski told Quartz.
The banks hit hardest would be smaller, regional players, the report noted, which could have broader economic impact.
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“As the regional banking institutions play an important role in lending to local businesses, their distress could lead to a credit crunch with adverse effects on the real economy,” the NBER study’s authors wrote.
March 7 (Reuters) - U.S. regional lenders face ongoing challenges from rising deposit costs and risky office-building loans a year after the biggest bank failures since 2008.
But hazards tied to commercial real estate — namely offices — still loom. Buildings nationwide sit empty as companies rethink how much in-person space they need, settle for smaller spaces or go completely remote. Restaurants in major downtowns are still closing their doors, bemoaning quiet weekdays and empty weekends.
Moody's has a negative outlook on the U.S. banking industry for 2024. Fitch gave the sector a deteriorating outlook, expecting a “moderate amount” of bank failures over the course of the year.
The turmoil in the U.S. commercial real estate market is already negatively affecting banks that hold a large amount of debt of struggling property developers. With the surge in interest rates, many property developers are struggling to refinance their debts, forcing some banks to boost their reserves for loan losses.
Nearly all banks are FDIC insured. You can look for the FDIC logo at bank teller windows or on the entrance to your bank branch. Credit unions are insured by the National Credit Union Administration.
Strong balance sheet. Consistent, sustainable performance. Regions reports third quarter 2023 earnings of $465 million, earnings per diluted share of $0.49 | Regions Financial Corporation.
Stung by those paper losses, fearful of a surge in late payments and loan defaults, and wary of further bank runs, lenders have pulled back from lending for commercial property. The upshot is the sector not only much higher interest payments on its massive debts, but also a credit crunch and declining asset values.
In the United States, with the largest commercial property market in the world, prices have tumbled by 11 percent since the Federal Reserve started raising interest rates in March 2022, erasing the gains of the preceding two years.
Powell: 'There will be bank failures' caused by commercial real estate losses. Federal Reserve Chair Jerome Powell said Thursday he expects to see some banks fail due to their exposure to the commercial real estate sector, which has declined significantly in value following the shift to remote work.
PHILADELPHIA (CBS/AP) -- Philadelphia-based Republic First Bank was closed by state regulators Friday night and its assets were given to the Federal Deposit Insurance Corp., FDIC announced in a news release.
Construction starts remain muted, and there are concerns that the volume of new multifamily units delivered to the market in 2024 could lag behind demand. If this trend continues, it has the potential to keep occupancy high, and as the supply of new units remains constrained, rent growth could pick up in 2024.
There are risks associated with both residential and commercial real estate, but because of the possibility of tenant turnover and lengthier leasing terms, commercial investments are typically a little riskier.
Many commercial loans were made during the recent period of historically low interest rates. So, they now face a double whammy. The persistence of working from home has driven falling asset values due to declining demand for office space, and building owners also significantly higher interest rates when refinancing.
Your Regions deposits are fully protected up to the standard deposit insurance amount by the Federal Deposit Insurance Corporation (FDIC). The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.
With interest rates appearing to have peaked and lenders' deposit costs easing, 2024 could turn out to be a far more hospitable year for U.S. regional banks than 2023. For U.S. regional banks, 2023 was a tumultuous year.
Remember that up to $250,000 per depositor is safe at financial institutions that are FDIC- or NCUA-insured — whether they're local, regional, or national.
Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.
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