Trading in florescent office lights for the comfort of home, by 2025, one in five Americans are expected to work remotely, according to the Census Bureau–a trend that terrifies the commercial real estate market and the banks that finance increasingly empty office buildings.
Plummeting office property values and high interest rates spell trouble: Economists at the National Bureau of Economic Research said 44% of office loans are for properties now worth less than their outstanding debt.
According to researchers at the International Monetary Fund, small and regional banks are almost five times more exposed to the sector than large firms. They pointed to the Mortgage Bankers Association’s estimate that more than $1 trillion in commercial real estate debt in the U.S. will come due in the next two years.
“Financial supervisors must continue to be vigilant. Rising delinquencies and defaults in the sector could restrict lending and trigger a vicious cycle of tighter funding conditions, falling commercial property prices, and losses for financial intermediaries with adverse spillovers to the rest of the economy,” the researchers wrote.
In a February interview with CNBC, JPMorgan Chase chairman and CEO Jamie Dimon was skeptical of fears the issue will spark a broader market downturn.
“If you have a recession, yes it will get worse. If we don’t have a recession, I think most people will be able to muddle through this, you know, refinance, put more equity in. And of course when you talk about defaults being higher, part of that’s just a normalization process,” Dimon said.
Large firms like JPMorgan Chase and Bank of America, whose chair and CEO Brian Moynihan called commercial real estate “a slow burn,” are much better positioned to weather negative outcomes than smaller firms like New York Community Bancorp.
Top ratings firm Moody’s downgraded the bank to junk status earlier this year. One vulnerability it cited was “(a)round 54% of its office loans are in Manhattan where office vacancy is around 15%.”
During a hearing last month before the House Financial Services Committee on the Federal Reserve’s Semi Annual Monetary Policy Report, Fed Chair Jerome Powell said this is a problem that will linger over the financial system for years.
Source: “Declines in office space value present years-long threat to financial system“
