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Commercial real estate: The next shoe to drop for the banking sector?
Michael Habib
Ben Zhou
Marc Nabi
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
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.
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