Biggest Commercial Real Estate Crash Since 2008 Could Spark $160B Bank Losses

• Commercial real estate could suffer its biggest crash since the Great Financial Crisis.
• That’s bad news for banks, which could see $160 billion in additional losses.
• That’s according to a recent NBER working paper, which examined the impact of the Fed’s rate hikes.

The commercial real estate sector is at risk of seeing its biggest crash since 2008, and that could slam US banks with up to $160 billion in losses. 

That’s according to a new working paper from researchers at USC, Columbia, Stanford, and Northwestern, assessing the impact of higher-for-longer interest rates on the commercial real estate industry and the US banking system.

The paper, titled “Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility,” used a framework developed earlier to examine the Fed’s aggressive rate hikes in 2022, which weighed down assets like stocks, bonds and commercial real estate.

It estimated that due to declines in property values from rate hikes and remote work, about 14% of all loans and 44% of office loans are in negative equity, meaning current values are less than outstanding loan balances.

As a result, 10%-20% of all commercial real estate loans could default — on the low end of what the default rate was estimated to be during the Great Financial Crisis — and banks could see around $160 billion in losses, according to the paper.

“This evidence suggests that if interest rates remain elevated and property values do not recover, default rates could potentially reach levels comparing or even surpassing those seen during the Great Recession,” it added.

Other experts have also warned of trouble for the commercial real estate space, as the industry has around $1.5 trillion in debt that’s set to mature over the coming years. 

The prospect of additional banks losses raises fears of another bank run, similar to the one that upended Silicon Valley Bank and other lenders earlier this year.

In the working paper, researchers estimated that in a scenario where half of uninsured depositors empty their accounts, losses related to commercial real estate could result in 31 to 67 smaller regional banks becoming insolvent. Another 340 banks could face insolvency due to losses stemming from higher interest rates.

“If such CRE loan distress would manifest itself early in 2022 when interest rates were low, not a single bank would fail, even under our most pessimistic scenario. However, we show that the large decline in banks’ asset values following this monetary tightening of 2022 has significantly eroded the banks’ ability to withstand adverse credit events.” researchers said. “This exposure leaves banks susceptible to significant solvency risk,” the paper later added.

Investors have been keeping an eye on the stability of the US banking system. In August, the ratings agency Moody’s lowered its credit rating of 10 large- and mid-sized US banks and placed another group of banks under review, partly due to higher risks on bank assets.