Real-Estate Doom Loop Threatens America’s Banks
Regional banks’ exposure to commercial real estate is more substantial than it appears
By Shane Shifflett and Konrad Putzier, The Wall Street Journal, Sept. 6, 2023
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Regional banks across the country gorged on commercial real-estate loans and related investments in big cities over the past decade.
With the commercial real-estate market now in meltdown, those trillions of dollars in loans and investments are a looming threat for the banking industry—and potentially the broader economy. Banks’ exposure is even bigger than commonly reported. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses…
Today’s troubled market, fueled by rising interest rates and high vacancies, follows years of boom times. Banks roughly doubled their lending to landlords from 2015 to 2022, to $2.2 trillion. Small and medium-size banks originated many of those loans, and all that lending helped push up property prices…
Direct plus indirect lending — along with foreclosed properties, trading portfolios and other assets linked to commercial properties — brings banks’ total exposure to commercial real estate to $3.6 trillion, according to a Wall Street Journal analysis. That’s equivalent to about 20% of their deposits…
The doom-loop scenario is starting to play out in big cities where office vacancies have soared. Real-estate investors that are unable to refinance their debt, or can only do it at high rates, are defaulting. The lenders, no longer getting the debt payments, often have to write down the value of those mortgages. Sometimes the bank ends up owning the property…[end quote]
The problems in CRE have been building for many months. Nearly $900 billion in commercial property loans are maturing this year and next, forcing many landlords to seek out more expensive financing from private investors and banks still willing to lend.
More small and medium size regional banks could fail in the years ahead. Many of these banks are the only source of commercial loans for small and medium sized businesses in their towns across the U.S.
Bank failures could undermine the economy in these towns. This is not a black swan but a potentially serious recessionary problem that is building.
Wendy