A potential collapse in the commercial real estate sector, the largest since 2008, could hit U.S. banks with up to $160 billion in losses.
What Happened: A working paper from researchers at USC, Columbia, Stanford, and Northwestern has assessed the impact of sustained high-interest rates on the commercial real estate industry and the U.S. banking system, reports Business Insider.
The study, “Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility,” used a model to analyze the effects of the Federal Reserve’s aggressive rate hikes in 2022 on assets such as stocks, bonds, and commercial real estate.
According to the paper, due to the devaluation in property values caused by rate hikes and remote work, 14% of all loans and 44% of office loans are said to be in negative equity, with current values less than outstanding loan balances.
Why It Matters: This could lead to a 10%-20% default rate on all commercial real estate loans, which is on the lower end of the estimated default rate during the Great Financial Crisis. As a result, banks could face around $160 billion in losses.
The study indicates that in the scenario where interest rates remain elevated and property values fail to rebound, default rates may potentially reach or exceed the levels observed during the Great Recession.
Other experts are worried about the commercial real estate sector, which has about $1.5 trillion in debt coming due soon. This might cause more losses for banks and make people fear another bank run, similar to what happened to Silicon Valley Bank and other lenders earlier this year.
The researchers concluded that this exposure leaves banks vulnerable to significant solvency risk.
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