Banks Are Taking Action to Avoid Office Space Worst-Case

An economist at commercial real estate services firm CBRE said recently that as many as 311 banks could fail if a worst-case scenario in CRE came to pass, American Banker reports. Such a scenario—where plummeting property values and net operating incomes lead to a total loss—is highly unlikely. But CBRE’s Richard Barkham said CRE exposure is “going to be a problem for bank earnings.”

Not 2008. Using data from the FDIC, CBRE identified institutions with CRE portfolios that could put them at risk. Barkham said “there isn't enough here to bring down the banking system” like the mortgage crisis did in 2008 and that suggesting so was “irresponsible.”

Out of office. At $21 trillion, the CRE market is less than half the size of residential real estate. And the most concerning CRE sector—office real estate—accounts for just 20%. But it’s still of great concern. The pandemic era shift to work-from-home-friendly policies has had a lasting effect: Office occupancy, revenues, and property values are low, while interest rates are high. It’s a “real issue” for banks, Federal Reserve Bank of New York President John Williams said last month.

Getting proactive. With an estimated $270 billion in CRE mortgages set to mature in 2023, how are banks reacting? Annie Rice, with the advisory firm JLL, said “banks are working closely with borrowers because they do not want to take assets.” So lenders are taking steps such as facilitating loan extensions and easing the conditions of recapitalization agreements, she said. 

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