The coming commercial real estate market crunch could have a significant impact on the US banking system, the Washington Examiner reported.
Due to rising interest rates and falling values, the commercial real estate sector faces a possible crisis in the next several years that could cause trouble for the banks that invested a lot of money into commercial real estate loans.
According to Jamie Woodwell, the head of commercial real estate research at the Mortgage Bankers Association, the low interest rates in 2021 prompted investors to sink money into commercial real estate since property values were high and the cap rates were low.
In the last quarter of 2021, the commercial real estate market was booming with a rush of loan activity that tied money in commercial properties that, as of now, are worth much less than they were 18 months ago.
Joe Griffith of the Heritage Foundation said excessive money printing coupled with cheap money is to blame for the booming commercial real estate market.
According to data from Trepp, as much as $270 billion in commercial real estate bank loans are set to mature, meaning the loan holders will have to refinance. But with higher interest rates, lower rent revenues, and the property values lower, there could be a wave of defaults in the commercial real estate sector.
If a loan goes into default, the bank will have to resell the property, Griffith told the Examiner. The risk banks face, however, is not being able to sell the property at a price that covers the mortgage.
Griffith explained that with more mortgage defaults come more bank foreclosures, forcing the banks to sell more properties. The high vacancy rates in commercial properties mean that companies don’t have sufficient cash flow to make mortgage payments, meaning the likelihood banks can recoup what they are owed on a mortgage “declines substantially.”
According to the Washington Examiner, as much as 80 percent of commercial real estate loans are held by small and mid-sized banks.