The turmoil that drove Silicon Valley Bank and Signature Bank out of business last month, rocking the wider banking sector, has analysts bracing for the next possible crisis: the $20 trillion commercial real estate market, The New York Times reported. The bank failures brought new scrutiny to other regional banks, which provide the bulk of commercial real estate loans. Those loans are then repackaged into complex financial products for investors in wider markets. And the outlook for the industry appears stark. Commercial real estate, the lifeblood of the lending business for regional banks, now “faces a huge hurdle,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, warned investors, adding to a growing chorus that has been expressing concerns about the industry’s looming challenges. Critics say that the sector is precarious thanks to a potentially toxic cocktail of post-pandemic office vacancies, rising interest rates and a mass refinancing of mortgages that lies ahead. Cities across the U.S. had been experiencing a plunge in demand for office space that accelerated during the height of the pandemic, and many were still struggling to bounce back, according to the National Association of Realtors. The bigger the city, the larger the decline, which has added up to a 12 percent office vacancy rate in the U.S., from 9.5 percent in 2019, the industry group reported in February. “Remote and hybrid work, layoffs and higher interest rates further increased office space availability in the market,” the group wrote. The debt on those office buildings will soon come due, whether or not the spaces are full. More than half of the $2.9 trillion in commercial mortgages will need to be renegotiated by the end of 2025. Local and regional banks are on the hook for most of those loans — nearly 70 percent, according to estimates from Bank of America and Goldman Sachs. (Subscription required to view article.)
