Another area of the market is feeling the stress. This time, it’s the $5.6T+ in commercial real estate loans held by banks.

But one area of CRE is feeling even more pain: offices. Their values have been hit hard by:

• Rising interest rates — which sent interest payments up and property values down.
• Remote work — since office occupancy is still only 50% at the start of 2023.

Bank problems are adding another source of pain. And it couldn’t come at a worse time.

A record $270B in commercial real estate mortgages are expiring this year — mostly held by smaller banks with under $250B in deposits.

Commercial lenders have two options.

• Refinance: Those holding fixed-rate mortgages will have to refinance at higher rates — eating their cash flow.
• Pay off the loan: If they can’t pay it off, that could lead to major defaults — hitting banks holding those loans.

Columbia Business School Professor Tomasz Piskorski expects many borrowers to have trouble paying off their loans (WSJ).

“I wouldn’t be surprised over the next six months, if you just saw a wave of defaults and keys getting handed back, because the offices are not getting filled up,”— per the CEO of real estate investment firm Palladius Capital Management (BBG).

Several major landlords have already called it quits this year:

• Brookfield defaulted on $784M in loans linked to two LA office towers.
• Pimco defaulted on $1.7B in loans on office buildings across the US.

Sprinkle of good news. Piper Sandler analyst Frank Schiraldi says these buildings have a “decent-sized cushion” — and banks lent more conservatively after 2008.