About $1.5 trillion in commercial real estate mortgages will come due over the next two years, spelling a major risk to the $20 trillion commercial real estate market ahead of the next presidential election, according to Politico.
The Federal Reserve raised interest rates by a quarter point in May, and high interest rates tend to drive down property values, increasing financial pressure on owners, according to Politico. Since commercial mortgages held by banks are with small or regional lenders, widespread write-downs on these loans could create problems throughout the economy. (RELATED: Job Gains Exceed Expectations Despite Fed’s Best Efforts To Cool Economy)
“Am I worried? The short answer is yes,” Republican Louisiana Sen. John Kennedy, a senior member of the Senate Banking Committee, told Politico. “The long answer is hell yes. I hope the Federal Reserve and the banking regulators are worried as well, and I hope they won’t be caught flat-footed like they were with the bank failures that we’ve had so far.”
SAN FRANCISCO, CALIFORNIA – MAY 09: A pedestrian walks by an empty retail space on May 09, 2023 in San Francisco, California. Getty Images
On top of rising interest rates, commercial buildings have also faced a fall in value due to remote work-related office vacancies, according to the Federal Reserve’s May report.
“Right now, we have the double whammy of much higher interest rates and the commercial real estate market going through a shock post-covid,” Democratic Virginia Sen. Mark Warner told Politico. “So I don’t think we can presume that… we’re going to be able to simply glide through [without a crash]. I’m still trying to sort through some of the policy options. … I have encouraged the White House, though, that we need to do some more intervention on these regional banks right away.”
Commercial real estate holders could experience credit loss due to “the magnitude of a correction in property values,” which “could lead to credit losses by holders of CRE debt,” according to the Federal Reserve.
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