Value Plunged By 30%! Commercial Real Estate Is Brewing More Problems For Regional Banks

The demand for commercial real estate in America is plummeting, resulting in an approximately 30% reduction in asset value.

Regional banks, which are highly connected to the commercial real estate sector, therefore are facing immense pressure, and Wall Street is concerned that improper handling could negatively impact economic growth.

Following the pandemic, demand for commercial real estate is shrinking, and office building values are on a decline, sparking worries among Wall Street veterans.

According to data from Real Capital Analytics, the nationwide price of office building properties has seen a plunge of around 20% from its apex. Ron Kamdem, a real estate investment trust equity analyst from Morgan Stanley, projects the fall from peak to trough of the property prices to be roughly 30%.

Starwood Capital's chairman and CEO, Barry Sternlicht, even said the commercial estate market is currently faced with an existential crisis - Assets valued at three trillion dollars might only be worth 1.8 trillion now.

The pandemic has brought significant changes to the work environment. With a hybrid work model becoming the norm, the majority of workers only spend a few days a week in the office. The demand for office space hardly seems likely to rebound to pre-pandemic levels.

Re-purposing offices is not an easy task either – it takes time and is relatively costly to upgrade older buildings. Vishwanath Tirupattur, the head of global quantitative research at Morgan Stanley thinks that the challenges faced by commercial real estate are likely to persist and will not be rapidly resolved.

In fact, analyst Neil Callanan thinks the American commercial real estate collapse is an inevitable result of quantitative easing policies, as quantitative easing policies have pushed investors away from safer assets like bonds and towards alternative assets like private equity, malls, and warehouses.

Regional banks are currently under immense pressure. Therefore, It goes without saying that these banks, which are deeply connected to office buildings, might impact financial development.

For example, the New York Community Bank recently opted to create a reserve, cut dividends, and increase provisions for loan losses to guard against unforeseen circumstances in commercial real estate lending.

This has drawn increased attention to American commercial real estate in the market. Subsequently, lenders and investors from Japan, Germany, and Canada have reported significant credit losses associated with American commercial real estate.

Meanwhile, in terms of the proportion of total loan amounts, commercial real estate risk exposure for the top 25 ranked banks is only 11%, while for regional banks, it is as high as 34%. Therefore, fundamentally speaking, it is mainly regional banks that are grappling with the challenges of commercial real estate.

In addition, according to a report from the US International Institute of Economics, due to the volatility of commercial real estate, as many as over 300 regional banks may face issues with insufficient solvency.