Lede

The downturn in the US commercial real estate market is causing concern for investors and regulators alike, with falling values of properties such as offices potentially creating ripple effects and adding to the pain for banks.

Summary

• The value of US buildings, such as offices, is crashing, causing concerns about the impact on banks and raising questions about damaging ripple effects.
• Investors and regulators, on high alert following recent bank failures, are now focusing on the $20tn US commercial real estate market.
• Commercial real estate, which includes offices, apartment complexes, warehouses and malls, has been put under substantial pressure in recent months. Data from Green Street shows prices in the US were down 15% in March from their recent peak.
• Falling prices are leading to trouble for banks given their extensive lending to the sector. The proportion of commercial office mortgages where borrowers are behind with payments is rising, and high-profile defaults are making headlines.
• The US commercial property market looks particularly vulnerable; however, the European Central Bank and Bank of England have also recently warned of risks linked to commercial real estate as the outlook for prices deteriorates.
• Office properties have been particularly affected due to the popularity of hybrid work, which has affected the rents that building owners can charge. Average occupancy of offices in the US is still less than half March 2020 levels, according to Kastle.
• Goldman Sachs estimates that 55% of US office loans sit on bank balance sheets, and regional and community banks account for 23% of the total.
• $270bn in commercial real estate loans held by banks will come due in 2023, with nearly $80bn on office properties. Plummeting valuations will make refinancing tougher for property owners, who may choose to hand back the keys instead of putting up more equity.
• The potential for contagion is causing concern, and if bank lending to commercial real estate becomes a systemic problem, it could prompt customers to yank their deposits, leading to a bank run.