Is commercial real estate the next fatal card?

market, is the demand for availability and cost of financing for commercial real estate loans. A growing share of commercial real estate loans from banks has come from regional and local banks in recent years - approximately 70% now comes from this category. Given the recent collapses of both SVB and SBNY, which had a large amount of commercial real estate assets, the market has begun to worry that regulation on these banks will tighten and access to credit will become increasingly restricted.

At the same time, the banks' problems have only added to concerns about the recent decline in commercial real estate values with interest rates rising rapidly. Investors have become increasingly''focused on the total amount of outstanding commercial real estate loans and how that debt will be refinanced - with approximately $5.4 trillion of commercial real estate debt outstanding and $1.2 trillion due in 2023 and 2024. High financing costs only exacerbate existing debt service problems, especially in office space and some retail segments where cash flow has become problematic due to post-pandemic behavior.

Although pressures are mounting - headlines are worse than reality

Although questions remain about refinancing at higher rates, it is important to assess the size of the problem. It is worth noting that the office space segment -''which, as mentioned, is one of the most distressed sectors of commercial real estate - represents only about 15% of the total value of commercial real estate. Currently, about $125 billion of office mortgages are due for repayment over the next 3 years. Some of these loans may need to be restructured, but the size of the problem is not comparable to the more than $2 trillion in bank capital. Office exposures for banks account for less than 5% of total loans and only 1.9% on average for large banks. At the same time, commercial real estate-office experts believe that any structural deterioration could occur within a few years as leases expire for''an extended period of time.

Big names in the headlines continue to cause concern among investors

-even giants like Blackstone, PIMCO, Brookfield, and Simon Properties find themselves in the news for significant defaults on commercial real estate.

A liquidity crisis like the one in 2008 will probably not happen.

Without minimizing the current problems of commercial'. 'conservative lending criteria.

The composition of borrowers has also improved significantly since the global financial crisis. Commercial mortgages, the riskiest type of loan for commercial real estate, now make up a much smaller portion of total debt. However, access to the commercial mortgage bond market has been significantly reduced, and the volatility of government bond rates has created an extremely challenging environment for managing commercial mortgage bond risk.

Total: Defaults are likely to increase, access to capital will become more limited, and credit conditions will tighten for the foreseeable future, but we believe the risk of loss in commercial real estate for''banks are currently under control, and even in the event of a severe decline (or some subset, such as commercial office), it is more likely to cause pressure on bank profits than a capital depletion. We do not believe that the level of losses in bank portfolios will reach the levels seen in the 2008-2009 period, when high construction and land loan losses caused a crisis in the housing and mortgage lending markets. Overall, a more severe economic downturn for 2023-2024 could exacerbate credit problems that would normally be avoided or stretched out over a longer period, putting pressure on banks' earnings growth and profitability. Accordingly, while we believe losses will be manageable, we''expect a significant deterioration in commercial real estate (or a sub-segment thereof such as commercial office), which could put pressure on bank stocks due to risk to profitability and raising concerns about possible spillover into other asset classes.