U.S. banking crisis looms over the commercial real estate market

Yahoo Finance’s Dani Romero joins the Live show to discuss how the commercial real estate market is being impacted by rising interest rates, and Silicon Valley Bank’s fallout.

Video transcript

BRAD SMITH: The commercial real estate sector has taken a beating in recent years. And now the banking crisis is likely to strike a few more blows. The pandemic left office buildings barren. And rising rates, they took a toll on the cost of commercial mortgages, which would likely be tough to refinance at current rates. Now a pullback in lending among small banks in the wake of Silicon Valley Bank's collapse could exacerbate some of those troubles. Yahoo Finance's Dani Romero has the latest. Hey, Dani.

DANI ROMERO: Hey, Brad. So if there's anything commercial real estate doesn't need right now, it is a banking crisis. These building owners have been hit hard by higher interest rates, which caused them to have higher borrowing costs for them and those property values to fall. Now they're faced with stricter lending rules. Loan officers have reported that they have experienced tighter lending standards in January for non-residential and multifamily properties. And they say that it's given to the recessionary fears.

But to put it into perspective, 80%-- more than 80% of commercial real estate loans are held by banks with fewer than $250 billion in assets. That's what Goldman Sachs says. And now there's new pressure on the regional bank side, given the recent news for Deutsche Bank, about their debt obligations.

But how did we get here? Smaller banks have actually been increasing their exposure to commercial real estate after the great financial crisis in 2008, which was triggered by a housing bust. And they stuck with it even after the pandemic. And now, with the Fed raising interest rates, what does that mean for the industry?

Well, Fed Chairman Jay Powell said in his press conference this week that he anticipates tighter credit conditions from banks as there is this pullback. He also said that the banks that have the high exposure to commercial real estate loans will not end up being like a Silicon Valley Bank issue. He said-- he, quote-- he said the banking system is strong. It is sound. It is resilient, and it is well capitalized. So he's even optimistic per se.

JARED BLIKRE: All right, so what's the next shoe to drop here for commercial real estate? We know the timelines, they take a lot longer to play out than, for instance, residential real estate because the leases are 10 years, but there are problems servicing. Just wondering what you're talking to some of your contacts about.

DANI ROMERO: Yeah, another area of concern is office space. And we've already seen that here in New York City that people are not flocking back to the office. They like that hybrid remote scenario. But data from Trepp actually shows that top office tenants that have a lot of exposure to that area include Western Alliance and First Republic Bank, with loans ranging from $170 to $570 million in size. So if we see property buildings default, that means that less valuable assets on a bank's balance sheet. So that would be not really a good picture. But again, like you said, it takes time for all of that to evolve.

JARED BLIKRE: You got to get those writedowns. Sometimes those take quarters to evolve. So we'll see what comes of that. Thank you for than, Dani Romero.