For the first time since at least 2012, the sale price of U.S. commercial real estate declined in the first quarter, year over year, according to a review of sales data by Moody’s Analytics.
Property prices ticked down 1 percent, led by multifamily housing and office buildings.
“Lots more price declines are coming,” Mark Zandi, Moody’s chief economist, said in comments quoted by Bloomberg.
Banks are in the crosshairs as those prices slide.
Of the $3.6 trillion in commercial real estate loans open at the end of last year, banks were holding at least $2.1 trillion, or about 60 percent of the loans. The figures exclude farm and residential properties.
About $700 billion of those loans were taken against office buildings and downtown retail properties.
Small and regional banks have particularly large portfolios of those loans, according to this month’s financial stability report from the U.S. Federal Reserve. Smaller banks made more than $500 billion of those loans, Fed data shows.
“The magnitude of a correction in property values could be sizable and could lead to credit losses” among banks, the report warned.
“We’re looking quite carefully at commercial real estate risks,” Michael Barr, the Fed’s vice-chair in charge of supervising banks, testified to Congress on 23 May.
“Regional and community banks currently account for a disproportionately large share of office real estate lending,” Bloomberg economist Stuart Paul said in a statement.
“Further consolidation of the banking industry may prove to be the solution that allows the banking industry to work out problem loans,” he noted.
However, many landlords still have a cash reserve built up as commercial property prices and values grew steadily through 2019.
“Delinquencies and defaults will rise, but I don’t think we’ll see a lot of forced sales,” Zandi said.
He expects prices to droop by another 10 percent, but if the U.S. falls into a recession, the losses could be much higher. “We’re on a razor’s edge,” he added.
TREND FORECAST: The permanent shift to remote work has shuttered thousands of downtown restaurants, shops, and service businesses in city centers, as we correctly predicted at the beginning the COVID War, and has forced landlords to cut rents and offer free months and other amenities to attract tenants. See:
● “THE NEW LIFE OF LOCKDOWN” (19 May 2020)
● “REMOTE WORK = COMMERCIAL BUST” (2 Jun 2020)
● “SLIDING VALUE OF OFFICE SPACE HITS URBAN CENTERS” (11 Aug 2020)
● “WORK FROM HOME, CITY REAL ESTATE DOWN” (20 Oct 2020)
● “OFFICE WORKERS STAY HOME” (8 Dec 2020)
● “RETURN TO OFFICES POSTPONED: COMMERCIAL REAL ESTATE BUST?” (14 Sep 2021)
● “WORKERS STAYING HOME, COMMERCIAL REAL ESTATE DISASTER LOOMING” (19 Oct 2021)
● “COVID WAR KEEPING WORKERS OUT OF THE OFFICE” (16 Nov 2021)
● “NYC BUSINESSES: BYE, BYE NYC” (16 Nov 2021)
TREND FORECAST: The danger to banks is yet another repercussion of the Office Building Bust, one of our Top 2023 Trends, which was created by the shift to remote work during the COVID War.
JPMorgan Chase, Wells Fargo, and other major banks have warned that $1.5 trillion in commercial real estate loans are coming due before 2026.
And as we have long forecast with higher interest rates and lower occupancy, the risk is growing that large numbers of property owners might be unable to repay their loans.
More than two-thirds of loans on commercial real estate are held by small and regional banks.
The crumbling commercial real estate market in cities comes at a time when banks expect regulators to require them to keep more cash on hand—hard to do if banks have a large number of loans that stop making payments.
As a result, more small banks will be forced to offer themselves up for sale to larger institutions, rendering the culture of “community banking” extinct in a growing number of locales.
Also, when the office building calamity becomes reality, more banks will crash and so too will Wall Street.