As commercial property prices decline due to a pandemic-induced decrease in office space demand, US banks are boosting provisions for credit losses, prompting concern from the IMF over an 11% property-value drop following Fed rate hikes in 2022
February 20, 2024 | Kevin LuarcaThe global commercial real estate (CRE) market is navigating turbulent waters, with US banks at the forefront of challenges stemming from a combination of economic shifts. The International Monetary Fund (IMF) recently expressed its concerns, highlighting an 11% decline in commercial property prices in the US since the Federal Reserve (Fed) began raising interest rates in March 2022. The IMF described the fall as “striking,” and notes that it surpasses previous episodes in terms of severity.
A number of factors work together to create the disquiet in the US CRE market. A key catalyst is the Fed raising interest rates from near zero to around 5%. It raised interest rates 11 times from March 2022 until December 2023. This rapid increase has led to a corresponding surge in mortgage rates and interest on mortgage-backed securities, placing added pressure on building owners who borrowed money to finance their properties.
The pandemic-induced shift towards remote and hybrid work also decreased the demand for office spaces, exacerbating the strain on the CRE market. As many companies downsize their office spaces, if not forego them entirely, foot traffic is reduced in key retail activity areas. This, in turn, placed additional strain on businesses struggling to pay rent or fulfill loan obligations as profits fell. This creates a dangerous feedback loop that spawns more vacancies in the CRE market, reinforcing the problem.
In response, US banks are grappling with the consequences within their portfolios. The IMF anticipates that soured CRE loans will continue to rise for at least a year, leading to subsequent charge-offs.
Bank of America (BoA) reported an increase in non-performing loans, reaching nearly $5 billion in the third quarter, predominantly due to challenges within its CRE portfolio.
In third-quarter earnings releases, major banks, including Morgan Sta...
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Keywords:Commercial Real Estate Dynamics, Pandemic-induced Decrease, Office Space Demand, Provisions For Credit Losses, International Monetary Fund (imf), Property-value Drop, Federal Reserve (fed), Interest Rates, Mortgage Rates, Remote And Hybrid Work, Foot Traffic, Charge-offs, Regional Banks, Hybrid And Remote Work Options, Commuting Time And Expenses, Employee Preference, Demographic Transformation, Non-working-age Population, Ageing Populations, Online-based Activities
