The Domino Effect: Bank Failures and the Ripple Effect on Commercial Properties
Latest CRE News: The recent failures of Silicon Valley Bank and Signature Bank have acted as a catalyst, putting the financial health of small and regional banks to the test, as a record number of commercial mortgages are set to expire in 2023. Smaller banks currently hold almost 80% of commercial mortgages, including rental-apartment mortgages, with around $2.3 trillion in commercial real estate debt, according to Trepp Inc. The pandemic era has led to a decline in the value of many office properties, intensifying the industry’s growing concerns about commercial real estate debt. This year is particularly critical, as about $270 billion in commercial mortgages held by banks are set to expire, with most of these loans held by banks with less than $250 billion in assets. A large number of defaults could force banks to mark down the value of these and other loans, reinforcing fears over the financial health of the US banking system.
The recent bank failures underscore the challenges that small banks are facing. According to an analysis by KBW Research, commercial real estate loans account for 38% of loan holdings at the median US bank. The value of loans and securities held by banks is around $2.2 trillion lower than the book value on their balance sheets, putting 186 banks at risk of failure if half their uninsured depositors decide to pull their money. While banks have lent more conservatively in recent years, interest rates and the pandemic have wreaked havoc with commercial property valuations. Although banks have some cushion to absorb some of the losses, there are concerns about the potential collapse of the commercial real estate market. However, it’s worth noting that government regulators have intervened in the past to help prevent the collapse of the market, and it’s likely they will do so again. Additionally, regulators can provide tools to banks to avoid taking losses, even when loans are in trouble, which may help alleviate some of the pressure on the banking system.
Empty Spaces, Empty Pockets: The Economic Consequences of Vacant Offices
The COVID-19 pandemic has significantly impacted the commercial real estate industry, with the office sector being hit particularly hard. As a result of the pandemic, many companies had to rapidly transition to remote work, leading to widespread vacancies in office spaces across the country. While many businesses have resumed in-person operations, the trend towards remote work is expected to continue, resulting in long-term changes in the way we use office space. Trepp, a leading provider of commercial real estate data and analytics, has found that in San Francisco, more than 60% of office property loans were close to or in default, while almost 40% were in default in Washington, D.C. This data highlights the struggle that property owners and investors are facing because of the pandemic and the shift towards remote work.
As the trend towards remote work continues, it is important for property owners and investors to adapt to the changing landscape of the commercial real estate industry. This may involve reimagining the use of office space or diversifying their investments to include other types of commercial properties that are benefiting from the shift towards remote work, such as hotels and warehouses. The impact of empty offices across the nation is multifaceted. On one hand, the decrease in demand for office space has led to a decrease in rental prices and an increase in sublease availability. This may be beneficial for some businesses looking to save on costs, but it also puts pressure on property owners and investors who rely on steady rental income to cover their mortgages and other expenses.
The decrease in demand for office space has also affected the bond market, specifically the commercial-mortgage-backed securities market. As mentioned earlier, the stress on the CMBS market has increased since the pandemic, and the recent collapse of Silicon Valley Bank and Signature Bank has raised concerns that regional banks might become more reluctant to make commercial real estate loans. This could make it harder for property owners to refinance their existing debt, resulting in more defaults and foreclosures. The impact of empty offices across the nation is far-reaching and complex. While the trend towards remote work may be beneficial for some businesses looking to save on costs, it has also put pressure on property owners, investors, and surrounding industries. The long-term effects of the pandemic on the commercial real estate industry remain to be seen, but it is clear that the landscape has been permanently altered.
The Impact of Oversupply and High Interest Rates on Office Valuations in CRE
The commercial real estate (CRE) industry has been facing a significant decrease in valuations, particularly in the office sector. One major factor contributing to this decline is the supply and demand imbalance, with an oversupply of office space and a decrease in demand due to the pandemic’s impact on remote work. This oversupply has resulted in a decrease in rental prices and an increase in sublease availability, putting pressure on property owners and investors who rely on steady rental income to cover their mortgages and other expenses.
Additionally, high interest rates have also wreaked havoc with commercial property valuations. Many owners with floating-rate mortgages must pay much more monthly debt service, cutting into their cash flows. Owners with fixed-rate mortgages will feel the pain of higher rates when they must refinance. As a result, property owners are finding it difficult to refinance their existing debt, which may result in more defaults and foreclosures. The oversupply of office space, combined with the impact of high interest rates, has made it increasingly challenging for property owners to maintain the value of their assets. This has led many to consider refinancing their properties or selling them altogether. However, with the current state of the market, both options come with challenges.
For those looking to refinance their properties, the current high interest rates may result in higher monthly payments and a decrease in cash flow. Additionally, lenders may be hesitant to provide refinancing options for properties that have experienced a decrease in value. On the other hand, those looking to sell their properties may face challenges due to the oversupply of office space and the decrease in demand. This oversupply has led to a decrease in property values and a decrease in demand from potential buyers, making it more difficult to find buyers willing to pay the desired price.
The Emergence of Industrial Development: 10 Markets to Watch
The demand for warehousing, shipping, and distribution centers is creating new sweet spots for industrial development, according to a recent report from Colliers. The report identified ten emerging markets highlighting the growing demand for industrial space in these cities. Among the top emerging markets identified in the report are Reno Sparks, Richmond VA, Salt Lake City, Savannah GA, Stockton/Central Valley CA, Austin, Charleston, Las Vegas, Memphis, and Raleigh Durham. These cities are experiencing a surge in demand for industrial space, driven in part by the growth of e-commerce and the need for faster and more efficient shipping and distribution.
These emerging markets offer a range of benefits for industrial development, including access to major highways, rail lines, and airports, as well as a skilled labor force and a supportive business environment. In addition, these cities have seen significant growth in e-commerce and logistics, making them attractive locations for warehousing and distribution centers. The development of these emerging markets for industrial development is not only beneficial for businesses in need of warehousing and distribution centers, but also for the local economy. The development of these centers brings jobs to the area, as well as increased tax revenue for the city and state. As e-commerce continues to grow, the demand for industrial space in these markets is expected to increase, providing significant opportunities for developers and investors. As the retail and logistics landscape continues to evolve, it is important to keep an eye on these emerging markets and the potential opportunities they present in the industrial sector.
Navigating the Challenging Market with AEI
As the commercial real estate industry faces challenges and shifts in demand, it is important to have a partner who can help navigate these difficult times. That’s where AEI comes in. We offer a range of services to help property owners and investors mitigate risk, reduce costs, and maintain the value of their assets.
- Environmental Consulting: With increasing regulatory scrutiny and environmental risks, our environmental consulting services help clients navigate complex regulations and mitigate environmental liabilities.
- Building Assessments: Our building assessment services help property owners identify potential issues with their buildings, including code violations, deferred maintenance, and health and safety risks.
- Capital Planning: Our capital planning services help property owners plan for and manage the costs associated with building maintenance, repairs, and upgrades, ensuring that they have the necessary funds to maintain the value of their assets.
- Construction Risk Management: With increasing construction costs and project risks, our construction risk management services help clients manage the risks associated with construction projects, including budget overruns, delays, and quality issues.
- Environmental Health, Safety & Compliance: Our environmental health, safety, and compliance services help clients meet their regulatory obligations and ensure the health and safety of their employees and tenants.
- Industrial Hygiene: With increasing concerns about indoor air quality and other health risks, our industrial hygiene services help clients identify and mitigate potential risks in their buildings.
- Land Surveying & Mapping: Our land surveying and mapping services help clients identify property boundaries and other critical information necessary for property transactions and development.
- Site Mitigation: Our site mitigation services help clients remediate environmental contamination, reducing their environmental liabilities and ensuring compliance with regulations.
- Energy & Sustainability Consulting: With increasing concerns about energy costs and sustainability, our energy and sustainability consulting services help clients reduce their energy costs and improve the sustainability of their buildings.
- Zoning Services: Our zoning services help clients navigate the complex zoning regulations and obtain the necessary permits and approvals for development projects.
- Commercial Valuation Services: Our commercial valuation services help clients determine the value of their assets and make informed decisions about buying, selling, or refinancing properties.
The challenges that the commercial real estate industry is facing require expert advice and assistance. At AEI, we provide a variety of services to assist clients in navigating these challenges, mitigating risk, and preserving the value of their assets. Contact us today to learn more about how we can help you succeed in the ever-changing commercial real estate industry.
Checkout Recent Blogs:
- Construction Risk Management: Ultimate Guide
- A Conceptual Budget Review’s Crucial Role
- Facility Condition Assessments 101
- Capital Planning: The Ultimate Guide
Most Sought Out Services:
Environmental Consulting, Building Assessments, Capital Planning, Construction Risk Management, Environmental Health, Safety & Compliance, Industrial Hygiene, Land Surveying and Mapping, Site Mitigation, Energy & Sustainability Consulting, Zoning Services, Commercial Valuation Services
Brownfields, Data Centers, Education, Agency Services, Government & Infrastructure, Hospitality, Industrial, Mixed-Use, Oil & Gas, Recreation, Retail, Telecommunications, Corporate Real Estate, Development/Redevelopment, Facilities, Financial Institutions, Healthcare, Housing & Urban Development (HUD), Legal, Office, REITS, Renewable Energy, Small Business Administration (SBA)