Building Stress: Are US Banks Headed for a Commercial Real Estate Reckoning?
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Building Stress: Are US Banks Headed for a Commercial Real Estate Reckoning?

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CEO Insight Minute: Are US Banks Headed for a Commercial Real Estate Reckoning?

We think bank losses on concentrated commercial real estate exposure will spill over into the broader US economy, and we see three implications for companies.

Banks are the largest lenders to commercial real estate (CRE) and have grown the business in the past decade. These loans are coming due amid decade-high interest rates and a drop in demand for office space stemming from hybrid work—upending a traditionally lower-risk business for banks. Financial institutions have yet to fully come to terms with their losses; the reckoning is coming.

Trusted Insights for What’s Ahead™

Banks are the largest lenders to commercial real estate (CRE) and have grown the business in the past decade. These loans are coming due amid decade-high interest rates and a drop in demand for office space stemming from hybrid work—upending a traditionally lower-risk business for banks. Financial institutions have yet to fully come to terms with their losses; the reckoning is coming.

Trusted Insights for What’s Ahead™

  • The largest banks, with over $250 billion in assets, are less at risk as they recognized problematic CRE loans, lifted loan loss allowances, possess an ample capital cushion, and do not exhibit concentrated CRE exposure.
  • However, small, midsize, and large banks are vulnerable because they have concentrated exposure, fewer allowances, and less capital to absorb CRE loan losses. These banks, with assets ranging from $100 million to $250 billion, will likely lift CRE charge-offs throughout 2024.
  • Banks, especially those with less than $100 billion in assets, are restricting lending to CRE. While this is reducing the issuance of new CRE loans, tighter lending standards cannot alleviate existing concentrations on bank balance sheets.
  • Companies will experience more restrictive financing conditions as the reckoning unfolds, one that will be worse in some areas of the country than others. To remain nimble and prudent, executives should review deposit insurance thresholds and ensure adequate working capital before, not during, the storm.
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