Banks facing $160B in losses on commercial real estate loans

Business

By Shannon Thaler

Banks are sitting on as much as $160 billion in losses on loans to the commercial real estate market as they brace for a wave of defaults from landlords in the year ahead, according to a report.

There is currently a 10% to 20% default rate on commercial real estate loans, equivalent to between $80 billion and $160 billion in bank losses, researchers from Columbia, Stanford, the University of Southern California and Northwestern wrote in a working paper published by the National Bureau of Economic Research this month.

The grim findings support an earlier calculation by Morgan Stanley that showed lenders would need to negotiate more than $1.5 trillion of their commercial real estate portfolios by the end of 2025 in order to avert defaults.

Commercial real estate, the lifeblood of the lending business, now “faces a huge hurdle,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, told the New York Times in April, citing post-pandemic office vacancies and interest rates — two headwinds borrowers are still facing.

Results of the NBER study were earlier reported on by The Times.

Residential real estate has been particularly volatile during this period of stubbornly-high interest and inflation, with the average rate on a 30-year mortgage climbing near 8% in late October, making it more financially sensible to rent rather than own property these days.

Commercial real estate hasn’t fared much better, as it’s still struggling to recover from the pandemic, when working from home became the new norm.

The so-called “doom loop,” where empty office buildings destroy quality of life and drive residents out, has persisted in the Big Apple, as occupancy in these sweeping spaces has only bounced back to 48.4%.

In 2020, office occupancy fell from nearly 90% to 10%. 

New York City’s Flatiron Building has sat vacant for so many years that its owners tapped the Brodsky Organization to embark on an office-to-residential makeover.

It’s still unclear what the grand transformation holds for the 120-year-old architectural masterpiece, such as whether it will be turned entirely into a residential haven, or if it might be split between luxurious condos and offices, or even it it will venture into the world of hotels.

Meanwhile, Signa Holding, the embattled, Austria-based co-owner of the iconic Chrysler Building — which has also been struggling to get occupancy over 80% — filed for bankruptcy in November.

Just this week, an Austrian court ordered the Rene Benko-founded property and retail giant to sell its take in the landmark New York City skyscraper.

It wasn’t immediately clear what Signa’s stake in the 77-story building is worth four years after it joined forces with New York real estate magnate Aby Rosen’s firm RFR Holding to collectively buy it for about $150 million.

The benchmark federal-funds rate advanced from near zero in March 2022 to its current 22-year high in July.

The Federal Reserve held rates steady — between 5.25% and 5.5% — at their latest policy meeting last week, and declared that it’s still too early to determine whether central bankers have achieved their goal of a recession-skirting “soft landing.”

Between the three consecutive policy meetings that the interest rate has remained in this range, commercial real estate owners haven’t been the only ones squeezed: Car payments defaulted at a level not seen in nearly three decades and credit card delinquencies crept near 4%, the highest in more than 10 years.