Commercial real estate values have already dropped 11% in the last year, with some properties selling for a 90% loss. This commercial real estate collapse is going to cause problems for the US Banking Sector.
Banks in America today hold nearly $3 trillion in Commercial Real Estate Debt. That’s twice as much as what Subprime Debt was in the 2008 crisis. And now those landlords for commercial properties are going into default.
Particularly on office buildings, where the default rate is surging. Asset managers like Brookfield and Blackstone are handing back office properties to their lenders because it doesn’t make sense for them to refinance given lower occupancy rates and higher interest rates.
As more of these mortgages go into default, there will be increasing pressure on banks to cut back new lending and to hold more cash. Which could trigger the existing credit crunch in the US economy to get worse. A worsening credit crunch would result in more layoffs and bankruptcies, and cause unemployment to rise.
In addition to office buildings, apartments and multifamily are also getting hit hard. Values in this sector are down by -12.5% already, the worst-hit commercial asset class. The reason apartment values are going down so much is because landlords bought building at aggressively low cap rates during the pandemic.
Now the loans on those properties are coming due at much higher interest rates, which is result in distress. Some landlords are already defaulting on their mortgages, while others are refinancing at higher rates and losing money.
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