K-12 Tax & spending Climate: A Reckoning Looms for Commercial Real Estate—and Its Lenders

Brian Graham:

Many banks are concentrated in and dependent on commercial property lending. Banks hold half of all commercial real-estate loans. The 5,000 or so U.S. community banks, with about a third of total assets, are two to three times as concentrated in commercial real-estate lending as the approximately 30 larger banks.

Problems in commercial real estate can hurt banks in two ways. Losses on existing loans can damage earnings directly, and a correction can reduce future lending volumes, impairing an important driver of earnings. Based on what we know now, things don’t look good.

Neiman Marcus and at least 28 other major retailers have filed for bankruptcy. Hotel occupancy is down 32%. The Journal reported last month that world-wide airline capacity in October was down 58% from 2019. Apartment rent levels have collapsed 15% to 25% in large cities including New York, San Francisco, Boston and Seattle. Suburban shopping malls have been devastated.

A recent Citigroup report on 400 properties in the retail and hotel sectors found an average decline in value of 27%. The stock prices of real-estate investment trusts, companies that own equity in commercial properties, are down 42% for retail properties since the most recent valuation prior to the pandemic onset in March. Office-property REITs are down 36% and lodging property REITs are down 50%—all despite the recent stock-market rally on vaccine news.