U.S. commercial property’s HK$8.38 trillion loan maturities threaten financial upheaval next year

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21st February 2024 – (Washington) The United States faces a potential financial crisis as substantial real estate loans mature in the near term. Data from TD Economics, a Canadian financial institution, forecasts that the U.S. is on the cusp of a significant challenge with $540 billion and $535 billion (totalling approximately HK$8.38 trillion) in commercial real estate loans set to mature this year and next. By 2027, this figure is projected to surge to $2.2 trillion (around HK$17.16 trillion), raising alarms over the possible repercussions for banking institutions and the broader financial landscape.

Economist Admir Kolaj, author of the report, notes a continual rise in the vacancy rates for office spaces within the U.S., coupled with stagnating rents. These symptoms are compounded by the anticipated economic slowdown and a decrease in hiring, factors that may exacerbate recessionary pressures.

The past year has already seen the New York Community Bank provisioning for considerable potential losses in commercial real estate credit. Similarly, Deutsche Bank announced a significant increase in provisions for U.S. commercial property loans in the last quarter, four times higher than the previous year.

The pandemic has ushered in a work-from-home (WFH) culture that has led to a diminished demand for office space. Despite efforts by employers to encourage a return to the office, remote working days remain high at 30%, a stark increase from the pre-pandemic levels of 5-7%. As a result, companies have been forced to reduce their rental footprint, with data analytics firm CoStar reporting that U.S. tenants handed back 65 million square feet of office space last year.

Bruce Richards, Chairman of Marathon Asset Management, has warned on social media about the default rates on commercial real estate loans held by small banks, which seem to be heading towards 8-10%. Such institutions are especially vulnerable to downturns in the commercial property market.

A recent study on the vulnerability of U.S. banks released in December last year suggests a 10% default rate in commercial real estate loans could subject banks to an additional loss of approximately $80 billion (about HK$624 billion). This situation could place over 300 banks at risk of runs, with smaller regional banks facing greater danger.