Commercial real estate defaults could spark second round of U.S. banking crisis in 2024

WASHINGTON, Dec. 29 (Xinhua) -- A possible wave of commercial real estate defaults threatens to prolong the U.S. regional banking crisis into 2024, according to some experts.

"It is all too likely that we will have another round of the regional bank crisis in 2024," Desmond Lachman, a senior fellow at the American Enterprise Institute and a former official at the International Monetary Fund, told Xinhua.

COMMERCIAL REAL ESTATE CRISIS

A possible commercial real estate crisis could impact regional banks next year.

In the wake of COVID-19, many professionals now work from home, while shoppers continue their migration online and away from malls, department stores and outlets.

As a result, commercial space vacancy rates have soared, and commercial property prices are plunging.

Major property investors, such as Brookfield and Blackstone, are starting to walk away from their mortgages, Lachman noted.

The scenario makes it more likely that commercial property owners will, possibly by next year, start defaulting on their loans.

That would be very bad news for small and mid-size banks.

That is because commercial real estate lending by small and mid-sized banks comprises roughly 18 percent of their overall loan portfolios, Lachman noted.

Such a scenario could cause 385 U.S. banks, mostly small and mid-size, to go bankrupt, according to a report released earlier this month by the National Bureau of Economic Research (NBER).

"All of this could pose a serious risk to the economic recovery," Lachman said.

Meanwhile, demand for commercial space continues to drop, with vacancies hitting around 20 percent in Q3.

The value of such properties declined around 20 percent from early 2022 until late 2023, and will likely slip 5 percent to 15 percent in 2024, according to international real estate company CBRE.

Investors could default on anywhere between 10 percent and 20 percent of commercial real estate loans, according to NBER.

Roughly 1.2 trillion U.S. dollars in commercial real estate was "potentially troubled" due to falling property values, according to a report released in August by advisory company Newmark Group, as reported in the Los Angeles Times.

Office space is the biggest problem in the short term, as it comprises over 50 percent of the 626 billion dollars of debt that's slated to mature by the end of 2025.

EMPTY OFFICES

Offices started emptying out during the COVID crisis, when millions of Americans made the shift to at-home work.

Many companies have been unable to persuade employees to return to the office five days a week, as employees are happy to save time and gas money on long commutes.

Sheila Reynolds, an office worker near Washington DC, told Xinhua she now commutes to the office three days a week. But some weeks she does not go to the office at all, explaining that she's "more productive at home."

Companies have also realized they can save money on electricity and other office-related expenses. Some firms have shut their offices completely, with staff working entirely at home.

Employees say the switch helps them remain motivated, as they now can avoid the stress of long commutes.

Some economists warn against comparing the current banking problems with the 2007-2008 meltdown sparked by the Lehman Brothers collapse.

"This is not in the same ballpark," Dean Baker, senior economist at the Center for Economic and Policy Research, told Xinhua.

That time was characterized by poorly capitalized banks with trillions of dollars of bad mortgage debt on their books.

It was inevitable that it would lead to a banking crisis, especially since it was coupled with a severe recession brought on by the collapse of the housing bubble, Baker said.