LondonCNN —
From Dallas and Minneapolis to New York and Los Angeles, offices sit vacant or underused, showing the staying power of the work-from-home era. But clear desks and quiet break rooms aren’t just a headache for bosses eager to gather teams in person.
Investors and regulators, on high alert for signs of trouble in the financial system following recent bank failures, are now homing in on the downturn in the $20 trillion US commercial real estate market.
Just as lenders to the sector grapple with turmoil triggered by rapidly rising interest rates, the value of buildings such as offices is crashing. That could add to pain for banks and raises concerns about damaging ripple effects.
“Although this is not yet a systemic problem for the banking sector, there are legitimate concerns about contagion,” said Eswar Prasad, an economics professor at Cornell University.
In the worst-case scenario, anxiety about bank lending to commercial real estate could spiral, prompting customers to yank their deposits. A bank run is what toppled Silicon Valley Bank last month, roiling financial markets and raising fears of a recession in the United States.
Asked about the risks posed by commercial real estate, Federal Reserve Chair Jerome Powell said last month that banks remained “strong” and “resilient.” But attention is growing on the links between US lenders and the property sector.
“We’re watching it pretty closely,” said Michael Reynolds, vice president of investment strategy at Glenmede, a wealth manager. While he doesn’t expect office loans to become a problem for all banks, “one or two” institutions could find themselves “caught offside.”
The European Central Bank and Bank of England also recently warned of risks in commercial real estate.
America’s top banker, JPMorgan Chase (JPM) CEO Jamie Dimon, told CNN Thursday that he couldn’t be sure whether more banks will fail this year. Yet he was quick to point out that the current situation was very different to the 2008 global financial crisis, when there were “hundreds of institutions around the world with far too much leverage.”
Work-from-home bill comes due
The commercial real estate sector — which spans offices, apartment complexes, warehouses and malls — has come under substantial pressure in recent months. Prices in the United States were down 15% in March from their recent peak, according to data provider Green Street. The rapid increase in interest rates over the past year has been painful, since purchases of commercial buildings are typically financed with large loans.
Office properties have been getting hammered the hardest. Hybrid work remains popular, affecting the rents many building owners can charge. Average occupancy of offices in the United States is still less than half March 2020 levels, according to data from security provider Kastle.