Top executives of U.S. financial institutions are expressing concern amid a drop in commercial property valuations, which poses a risk to lenders’ balance sheets.
Currently,
offices are the most affected type of commercial real estate due to a
widespread shift from in-person working to remote, brought on by the
COVID-19 pandemic.
- Rising interest rates are also threatening commercial real estate.
- Wells Fargo reported a 50% increase in its non-performing commercial real estate loans from Dec. 2022 to Q1 2023.
- Commercial
real estate loans comprise roughly 40% of smaller banks’ total lending,
compared to 13% for larger financial institutions.
- The broader concern is that nearly $1.5B of U.S. commercial real estate debt is due for repayment before the end of 2025, causing big lenders to wonder who will foot the bill.
- Despite
these current setbacks, there are still areas of commercial real estate
that are lucrative. According to Jonathan Gray, president of
Blackstone, logistics, hotels, rental housing, and data centers “are
still performing quite well.”
- Morgan Stanley projects that office and retail property valuations could drop as much as 40%.
