Wednesday, July 5, 2023, 11:28 a.m
2519 readings
After crisis the 2008 “subprime” loans and the collapse of the “mall” market during the pandemic, a new real estate crisis is on the horizon in the United States.
The decrease in real estate values and the increase in the number of vacant homes could lead to a reduction in the value of the guarantees used to grant loans for the purchase of offices.
Both small regional banks and insurance companies have heavy exposure to commercial real estate risks, which could lead to another financial crisis.
“Real Estate Crisis 3.0”
After the residential sector (“Big Short 1.0”) and “malls” (“Big Short 2.0”), version 3.0 of the real estate crisis is mainly focused on offices, warns Charles-Henry Monchau, director of the investment division of the Swiss banking group SYZ.
The size of the commercial real estate market in the United States is $11 trillion, of which $4.5 trillion is financed through LIABILITIES. However, the strain is currently visible only in offices, while the rest of the commercial real estate market is holding up well.
On the other hand, banks are very involved in the financing of commercial real estate, including when it comes to granting loans for the purchase of office buildings.
Banks are estimated to hold about 39 percent of the $4.5 trillion in commercial real estate debt, leaving them exposed to some vulnerability the day borrowers default on their loans.
This can lead to an increase in the default rate and potential losses for banks.
A new period of uncertainty
Bad loans and foreclosures in the office sector could have a negative impact on banks’ asset quality, profitability and capital adequacy ratios, undermining the financial stability of weaker players, the financial analyst explains.
Small regional banks are more exposed to commercial real estate risks because they focus their lending heavily on this category.
Two-thirds of their loans are focused on commercial real estate, compared to one-third on residential real estate.
Insurance companies also have significant exposure to U.S. real estate debt and have $666 billion in exposure to commercial real estate.
With the collapse of several banks (Silicon Valley Bank, Signature Bank, First Republic Bank) in the first half of the year, the tightening of the Federal Reserve’s monetary policy could be felt.
The question is, however, whether the big bankruptcies have been or are yet to come. Are the banks that have already collapsed whales or just small fish?
At the moment, it is very difficult to answer this question. However, the financial analyst says that the financial market is entering a new period of uncertainty.
2023-07-05 08:31:27
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