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Will empty offices cause the next banking crisis? Commercial real estate ‘debt

  • Some $929 billion in commercial real estate loans will come due in 2024
  • About 14% of all CRE loans and 44% of office loans appear to be underwater
  • Recent study warns of widespread risk of bank failures if defaults spike to 10% 

Experts are sounding alarms that the distressed US commercial real estate market could trigger a new banking crisis, if default rates on commercial mortgages rise sharply. 

Some $929 billion of outstanding commercial mortgages held by lenders and investors will mature in 2024, or 20 percent of the $4.7 trillion total outstanding debt, according to recent data from the Mortgage Bankers Association.

Meanwhile, higher interest rates are battering commercial real estate (CRE) property values across the board, with office buildings hit particularly hard due to the enduring popularity of remote and hybrid working.  

Disturbingly, about 14 percent of all CRE loans, and 44 percent of office loans, appear to be ‘underwater,’ with current property values that are less than the outstanding loan balances, according to a recent working paper for the National Bureau of Economic Research.

‘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,’ one of the co-authors, Columbia Business School professor Tomasz Piskorski, told

Traditional banks hold roughly half of the $929 billion in commercial mortgages set to hit maturity this year. That total is a 28% increase from the $728 billion that matured in 2023
180 Grand Avenue in Oakland, California (above) sold for $119 million in 2017, but the loan is now listed as ‘non-performing’ and control of the building is up for sale

If default rates on CRE loans jumped to 10 percent, the study estimates that 231 US banks, with aggregate assets of $1 trillion, would see the market value of their assets fall below the value of their customer deposits.

That situation could spur panicked customers to withdraw their uninsured deposits, in the same kind of rapid bank run that triggered the collapse of Silicon Valley Bank last year.

‘Because of the high interest rates, there are dozens to hundreds of banks that are at the brink of solvency. So this additional commercial real estate distress puts them into the group of banks that potentially are susceptible to runs by depositors,’ Piskorski said in a Zoom interview this week. 

‘This is the icing on the cake that can really create a problem for quite a few banks, mainly smaller and mid-sized banks,’ he added. 

Piskorski said that he and his co-authors view a commercial mortgage default rate of 10 percent or more as ‘quite likely’ given the current share of underwater loans.

Unlike home mortgages, where the principle is paid down over time, most CRE loans are interest-only — meaning that when they mature, they must either be paid in full or refinanced. 

Given that many outstanding CRE loans were issued when interest rates were lower, even properties that are not underwater may struggle to find a bank willing to refinance. Others may struggle to meet higher interest payments.

For consumers, Shark Tank star Kevin O’Leary advises avoiding small regional banks, and keeping deposits in large national banks that are ‘too big to fail’

‘Regional banks are doomed,’ he wrote in a recent column for ‘Start moving your money now.’ 

Others fear contagion from a possible banking crisis could threaten the broader financial system.  

A recent report from a financial regulator established in the wake of the Great Recession listed the commercial real estate market as first among financial risks to the US economy.

‘As losses from a CRE loan portfolio accumulate, they can spill over into the broader financial system,’ states the annual report from the Financial Stability Oversight Council.

FSOC warned of the potential for a ‘downward CRE valuation spiral’ in which sales of financially distressed properties flood the market, reducing the market values of nearby properties.

Such a downward spiral could send other commercial mortgages underwater, raising default rates and even reducing municipalities’ property tax revenues.

Why are commercial property values down?

Overall, US commercial property values are down 21 percent from their recent peak in March 2022, when interest rates began to rise, according to real estate advisory firm Green Street.

Office values have dropped most sharply, down 35 percent from that peak, but the decline has hit across the board, from apartment buildings and strip malls to healthcare and self-storage facilities. 

Dylan Burzinski, an analyst and head of office sector research at Green Street, told that the 35…

Read More: Will empty offices cause the next banking crisis? Commercial real estate ‘debt

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