The Next Catastrophe For Banks: $3.5 Trillion In Commercial Real Estate Debt

In a long, analytic article about commercial real estate, The New York Post points out that the debt backed by commercial real estate in the US has hit $3.5 trillion. The paper writes that “about $1.4 trillion in real estate debt is set to mature over the next four years, with some $204 billion coming due this year alone.”

Banks may be in no mood to alter terms of commercial mortgages, but will they have a choice?

The problem is not unlike the one that financial firms have faced and are still facing with residential housing, although commercial loans have not, in most cases, been securitized the way that mortgages were. There is a bit of good news in that. Because there is no large market for commercial mortgage-backed securities, there should not be a massive process of deleveraging to hit banks with another wave of derivatives losses.

But, with commercial real estate occupancy rates falling and downward pressure on rates, money center and regional banks will be forced to write-off some of the value of loans that are renegotiating, or worse, be forced to take ownership of commercial real estate properties which are likely to continue to lose their values.

Whether the recent “stress tests” of the 19 largest US banks adequately accounted for a disaster in the commercial real estate market is hard to tell, but the losses these financial firms are facing could clearly go into the tens of billions of dollars during the next half a decade.

Douglas A. McIntyre