Banking crisis spells trouble for commercial real estate

Commercial real estate

Economists warn that the U.S. commercial real estate industry is in trouble following the recent meltdown in the banking industry. A Goldman Sachs report shows that about 80% of all bank loans for commercial properties come from regional banks that are experiencing the most pressure during the current crisis, which began earlier this month with the collapse of Silicon Valley Bank and Signature Bank.

“There were already liquidity issues. There were fewer deals getting done,” Xander Snyder, First American senior commercial real estate economist, told Yahoo Finance in an interview. “Access to capital was getting scarcer, and this banking crisis is almost certainly gonna compound that.”

After decades low interest rates and easy credit, the commercial real estate sector – which is worth around $20 trillion- is headed for a mess.

Higher interest rates are one factor, but also a lot of commercial office space is still not at pre-Covid capacity levels, putting pressure on income. Recent banking stress will likely add to those woes.

“The banking sector, which was already limiting its exposure to real estate, may look to restrict lending even further after the recent collapse, especially among regional and community banks,” Chad Littell, CoStar Group’s national director of U.S. capital markets analytics, wrote in a recent report.

“I do think you will see banks pull back on commercial real estate commitments more rapidly in a world [where] they’re more focused on liquidity,” wrote Goldman Sachs Research’s Richard Ramsden in a note on March 24. “And I do think that is going to be something that will be important to watch over the coming months and quarters.”

Trepp estimates that this year, roughly $270 billion in commercial mortgages held by banks are set to expire and $1.4 trillion over the next five years.

(Graph source: Federal Reserve)