US banks could get slammed with another $160 billion in losses as commercial real estate faces its biggest crash since 2008

US banks could get slammed with another $160 billion in losses as commercial real estate faces its biggest crash since 2008, per BI.


According to a recent working paper by researchers from USC, Columbia, Stanford, and Northwestern, which assessed the impact of prolonged higher interest rates on the commercial real estate industry and the US banking system, potential distress is looming. The paper, titled "Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility," examined the consequences of the Fed's aggressive rate hikes in 2022. It estimated that due to declines in property values from rate hikes and the rise of remote work, approximately 14% of all loans and 44% of office loans are in negative equity, where current values are lower than outstanding loan balances.

As a result, 10%-20% of all commercial real estate loans could potentially default, which is on the lower end of what the default rate was estimated to be during the Great Financial Crisis. This could lead to banks experiencing around $160 billion in losses, according to the paper. The researchers warned that if interest rates remain elevated and property values do not recover, default rates could potentially reach or even surpass those seen during the Great Recession.

Concerns are also rising about the commercial real estate space, given that the industry has approximately $1.5 trillion in debt set to mature in the coming years. The possibility of additional bank losses raises fears of another bank run, similar to the one that affected Silicon Valley Bank and other lenders earlier this year. The paper estimated that if half of uninsured depositors empty their accounts, losses related to commercial real estate could lead to 31 to 67 smaller regional banks becoming insolvent. Another 340 banks could face insolvency due to losses stemming from higher interest rates.

The paper concluded by stating that banks' exposure to commercial real estate loan distress, combined with the decline in banks' asset values following the monetary tightening of 2022, significantly erodes their ability to withstand adverse credit events, leaving them susceptible to significant solvency risk. Investors are closely monitoring the stability of the US banking system, especially after Moody's lowered its credit rating for 10 large- and mid-sized US banks in August and placed another group of banks under review, partly due to higher risks on bank assets.