Banking Worries in the US Triggered by $1.2 Trillion Commercial Real Estate Crisis: Here’s What You Need to Know

New York, USA – The banking industry in the US is facing mounting concerns this week, sparked by a series of troubling developments. New York Community Bancorp’s decision to cut its dividend in response to higher capital requirements and commercial strain, along with reported unexpected losses on US commercial real estate by a Japanese bank and Deutsche Bank, have sent ripples of unease through the financial sector.

The uncertainties surrounding the economic landscape, coupled with these headlines, have resulted in a 14 basis points drop in US 10-year yields over the week. The echoes of the 2008 subprime crisis can be heard, as the full scope of the problem, the entities bearing the losses, and the potential management of the situation remain unclear. This is exacerbated by the severe impact of the pandemic on office real estate, with high vacancies and tenants wielding significant leverage to negotiate lower rents due to remote work trends.

Banking regulations mandate the recognition of impairments once losses become foreseeable, but the lack of clarity on the return of workers to office spaces and the potential relocation of companies has hindered this process. Despite the uncertainties, it is anticipated that losses will be substantial. Goldman Sachs estimates that $1.2 trillion of commercial mortgages are set to mature this year and the next, representing a quarter of all outstanding commercial mortgages, the highest level recorded since 2008.

According to Reuters, the estimated “maturity wall” could be as high as $1.5 trillion, further underscoring the magnitude of the issue. The prevailing sentiment was summed up by Barry Sternlicht, CEO of Starwood Capital Group, who described the office market as facing an “existential crisis,” with the $3 trillion asset class potentially being valued at $1.8 trillion, leaving $1.2 trillion of losses distributed across the industry. To put this into perspective, the entire subprime US mortgage market in 2007 was valued at $1.3 trillion.

Compounding the precarious situation are the significant holdings of small/regional banks, which lack the capacity to absorb substantial losses, and the prohibitively expensive and, in some cases, unattainable options for raising new capital due to bond market losses. The resultant unease in the bond market has caused considerable apprehension within the industry. The event is a stark reminder of the impact of unforeseen circumstances on the banking sector and the broader economy.