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Commercial real estate: The next shoe to drop for the banking sector?
Michael Habib
Fixed Income Investment Analyst Los Angeles
Ben Zhou
Equity Investment Analyst
Marc Nabi
Equity Investment Director
May 31, 2023

Even before the collapse of Silicon Valley Bank, the outlook for parts of the CRE market appeared dim. Now with lending standards growing tighter, investors are getting increasingly nervous about problematic properties lurking on bank balance sheets.


Banks, especially small regional names in the US, have substantial exposure to the CRE market. Within banks’ CRE portfolios, exposure to higher risk subcategories (retail, office, construction/development) is greater at the regional banks than the megabanks.


Smallest banks have outsized CRE exposure 

d7_smallest-banks-have-outsized-cre-exposure_chart_916px (en).png

Data as at 8 May 2023. Commercial real estate holdings in Q4 2022 nonfarm non-residential, including office and downtown retail. US G-SIB: global systemically important banks headquartered in US Category II: greater than or equal to US$700 billion total assets or US$75 billion in cross-jurisdictional activity. Category III: greater than or equal to US$250 billion total assets or US$75 billion in nonbank assets, weighted short-term wholesale funding or off-balance sheet exposure. Category IV: other firms with US$100 billion to US$250 billion total assets. Source: US Federal Reserve Board staff calculations

Interest rates are high, which can make refinancing uneconomical, even for properties that are still performing well. This means some leading major real estate investors are likely to “turn in the keys” and hand properties back to the lenders. As these strategic defaults pick up, banks will face losses.


Michael Habib is a fixed income investment analyst at Capital Group with research responsibility for Canadian, U.S. and Australian banks. He has 10 years of investment industry experience and has been with Capital Group for five years. Prior to joining Capital, Michael worked as a private equity associate at Bank of America Merrill Lynch and Audax Group. He holds an MBA from University of Chicago and an honors bachelor's degree from University of Western Ontario. Michael is based in Los Angeles.

Ben Zhou is an equity investment analyst at Capital Group with research responsibility for REITs in the US and tobacco globally. He has six years of investment industry experience and has been with Capital Group for four years. He holds an MBA from The Wharton School and a bachelor's degree in economics from Harvard College. Ben is based in New York. 

Marc Nabi is an equity investment director with 35 years of investment industry experience. He holds an MBA from New York University and a bachelor’s degree from the University of Michigan.

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