Regulators and analysts are growing more concerned about commercial real estate debt as a result of the turbulence in the banking industry, particularly when it comes to loans backed by office buildings since corporate tenants embraced new hybrid workplace practices during the pandemic age. Several skyscrapers, business parks, and other office complexes have already seen a decline in value.
Nearly $270 billion in commercial mortgages held by banks, the highest number on record, are slated to expire this year. The majority of these loans are held by banks with assets under $250 billion. Markets would feel more secure if those debts were paid off, yet it’s estimated that many borrowers will struggle to repay their debts as interest rates have climbed even higher. Many commercial property owners with floating-rate mortgages must now pay significantly more in debt service each month, which can even become more than the building’s income. More defaults might compel banks to reduce their exposure to commercial real estate, future drying up lending sources.
The good news is that banks have been lending more cautiously recently than they did prior to the financial crisis of 2008. Additionally, government authorities have provided banks with strategies to minimize suffering losses even in the case of troubled loans that are restructured to offer debtors additional time and flexibility to make their payments. But those strategies were drafted in response to the financial crisis, meaning that they didn’t take today’s economic climate into account (i.e. ballooning interest rates that would have an adverse effect on commercial property portfolios), so it may take more to redress the balance.