Real estate calamity is a signal that US banks are failing

It's no secret that U.S. commercial real estate is in a tough spot. And its decline could lead to the failure of as many as 385 U.S. banks, most of which are smaller regional banks, according to a new report from the National Bureau of Economic Research (NBER).

That's because more investors are expected to default on commercial real estate loans due to prolonged high interest rates and declining real estate values. These defaults can trigger bank panics of uninsured depositors, as happened with Silicon Valley Bank in March.

Very interesting information published by Smart Investing reports a growing number of investors defaulting on commercial real estate loans. Analysts note that the main factor in the decline in demand for commercial real estate has been the emergence of the hybrid form of operation, which has hit the commercial real estate sector hard. Lower demand for office space led to a rise in vacancy rates to 20% in the third quarter. According to global real estate firm CBRE, commercial real estate values in the U.S. fell by about 20% from the beginning of 2022 to the end of 2023, and could fall another 5% to 15% next year.

High interest rates will make it difficult for investors to refinance their commercial real estate loans, about 40% of which will have to be repaid between 2023 and 2025, the NBER study indicates.

According to the report (pdf), investors could default on 10% to 20% of commercial real estate loans, which make up about a quarter of all assets held by the average U.S. bank. For uninsured depositors, this could cause them to flee banks. Because of the declining asset values of banks, they don't have enough capital to pay off their debts. This could result in more banks declaring bankruptcy. This would mostly affect smaller regional banks, which could have a negative impact on the economy as a whole. In their report, the authors of the NBER study note that "because regional banks play an important role in lending to local businesses, financial distress at these banks could lead to a credit crisis with negative consequences for the real economy." Investors and regional banks should be cautious and prepared for a possible downturn in commercial real estate in the U.S. market and its consequences.