Van Nieuwerburgh said he wouldn’t be surprised if 10 percent of commercial real estate loans can’t be refinanced, especially as banks grow more cautious about lending against real estate.Ĭommercial real estate stocks are down this year: An index of publicly traded commercial real estate investment trusts had fallen 18.1 percent in a year as of June 2. “The bank will say, no, the interest rate is now 6 percent instead of 3 percent 10 years ago, which means that your building is now worth 40 percent lower.” “The way these loans are structured, you’re mostly paying interest, not principal, so you have to roll over most of the loan” when it comes due, he said. “All you have to do is walk through the downtown of a major American city.”īut “it would be a mistake to conclude that the problems are isolated to the office market - higher interest rates impact all types of real estate,” Van Nieuwerburgh said. “That could be a train wreck waiting to happen,” warned Dan Tarullo, a former top Fed official who overhauled bank regulations in the wake of the 2008 financial crisis. The office vacancy rate hit 18.6 percent in the first quarter of 2023 - well above the pre-pandemic level - according to an estimate from Cushman and Wakefield, which doesn’t expect vacancy rates to stabilize until 2024. The pandemic-induced rise of remote work has hammered offices. The “best-case scenario” for the market is that a wipeout would be “isolated to a few banks that have a lot of office loan exposure,” according to Stijn Van Nieuwerburgh, a Columbia Business School professor of real estate and finance. They need to “insist that banks and other lenders appropriately hedge against the risks of a significant downturn in commercial real estate,” the Massachusetts Democrat said. Elizabeth Warren says regulators have a key role to play in heading off any crisis. White House economic adviser Jared Bernstein told a panel of lawmakers in April that the issue “is very much on our watch list” when asked about the potential for a significant downturn in the market. “I have encouraged the White House, though, that we need to do some more intervention on these regional banks right away.” “I’m still trying to sort through some of the policy options,” said Warner, who declined to detail his ideas.
we’re going to be able to simply glide through. “Right now, we have the double whammy of much higher interest rates and the commercial real estate market going through a shock post-Covid,” Sen.
And the Fed itself flagged commercial real estate as an area of concern in its May Financial Stability Report, warning that “the magnitude of a correction in property values could be sizable and therefore could lead to credit losses” by banks and investors holding commercial real estate debt.
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