What’s going on:
Investors and regulators, on high alert due to recent bank failures, are now taking a closer look at the slumping US commercial real estate market, which is worth $20 trillion.
The commercial real estate market has taken a huge hit in the past few months, with US prices plummeting by a staggering 15% from their previous high in March.
Hybrid and remote work continues to be a dominant force in America, leaving building owners with the challenge of reduced rental income. CNN Business reports that the average occupancy of offices in the US is lagging behind pre-pandemic numbers, hovering below 50% of March 2020 levels.
This year, approximately $270 billion worth of commercial real estate loans are due. Whether they will be paid back is the pressing question.
Why it matters:
With interest rates soaring, lenders to this sector are struggling, causing a drastic drop in office buildings’ values. This spells out more trouble for banks and could have disastrous ripple effects.
If fear of inadequate bank lending to commercial real estate takes a turn for the worse, this may cause customers to suddenly withdraw their funds, which is exactly what happened with the Silicon Valley Bank last month.
The European Central Bank and Bank of England have recently raised the alarm about the risks associated with commercial real estate investments as its market outlook becomes increasingly grim.
How it’ll impact the future:
Jamie Dimon, America’s top banker and CEO of JPMorgan Chase has said that he couldn’t confidently predict whether additional banks will go bust this year; yet he made sure to emphasize that the present crisis is nothing like the global financial turmoil of 2008.
The most probable outcome in this situation will be an increase in loan defaults and reduced financing availability for the commercial real estate sector.