According to Politico, $1.5 trillion in commercial mortgages will come due within the next two years. Because a reported 70% of these mortgages are being held by small mortgage lenders or community or regional banks, many onlookers remain on tenterhooks as high interest rates and unused properties devalue the market ahead of a possible recession.
The office landscape has changed dramatically since the pandemic started over three years ago. The way we work has changed. Widespread adoption of work from home, shared, hybrid and flex space scenarios has fueled lower commercial occupancy rates and values.
More recently, the spate of recent bank failures has added to the commercial real estate sector’s woes. With bank stability in question and with a large concentration of commercial mortgages supplied by small lenders (Goldman Sachs puts it closer to 80%), the health of the commercial market is going to have a significant impact on the larger economy and is a growing concern for government policymakers.
“Am I worried? The short answer is yes,” said Sen. John Kennedy (R-La.), a senior member of the Senate Banking Committee. “The long answer is hell yes. I hope the Federal Reserve and the banking regulators are worried as well, and I hope they won’t be caught flat-footed like they were with the bank failures that we’ve had so far.”
FDIC and Fed Warn Banks To Tread Carefully
With property values lagging, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve itself is warning banking institutions to be careful with its management of commercial real estate sector. A trend toward tightening private lending is already underway, with more regulatory scrutiny to follow.
“I do think you will see banks pull back on commercial real estate commitments more rapidly in a world [where] they’re more focused on liquidity,” wrote Goldman Sachs Research’s Richard Ramsden in a March note. “And I do think that is going to be something that will be important to watch over the coming months and quarters.”
First American economist Xander Snyder echoes this outlook. Speaking to CNN Business, he said, “Now private lending to the industry is starting to slow as well — bank lending was beginning to dry up over a month before the Silicon Valley Bank failure even happened. Credit was getting scarce for all commercial real estate and a fresh bank failure on top of that only exacerbates that trend.”
For now, forecasters are predicting a real estate crash if the market can’t rebound or repurpose commercial space into residential housing or apartments, as Sen. Jon Tester (D-Mont.) suggested, per Politico. Office vacancy rates increased to 18.6% this year — and with no stabilization end in sight, many experts feel the sector is already, in the words of former top Fed official Dan Tarullo, “A train wreck waiting to happen.”
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