Some $1.5 trillion in mortgages will come due in the next two years – paving the way for a potential financial crisis as higher interest rates push down property values.
As this event looms, big banks such as Wells Fargo are already cutting their losses by preparing to offload debts at a discount even when borrowers are up to date – a sign of their lack of faith in the once stalwart commercial real estate market.
Meanwhile, higher interest rates meant to hamper inflation continue to push down property values by deterring buyers – a phenomenon compounded by continued office vacancies.
The pandemic-induced phenomenon comes as remote work has maintained prominence since its surfacing during the pandemic – and advent that has hammered offices, and now the banks’ providing them property loans.
The willingness of some lenders to take losses on real estate loans that as of now are performing comes as multiple experts continue to warn the asset class is the ‘next shoe to drop’ following the recent turmoil in the banking industry – increasing the likelihood of another recession wrought by a mortgage crisis.
Some $1.5 trillion in mortgages will come due in the next two years – paving the way for a potential financial crisis as higher interest rates push down property values.
The phenomenon has been further compounded by office vacancies , as a sizable amount of Americans continue to work from home even after the pandemic. This graph shows work from home data among Americans from 1965 through 2023, which remains elevated
‘Am I worried? The short answer is, “yes”. The long answer is, “hell yes,”‘ Senior Senate Banking Committee member John Kennedy told Politico Monday of what many say is the next big threat over the US economy.
‘I hope the Federal Reserve and the banking regulators are worried as well, and I hope they won’t be caught flat-footed like they were with the bank failures that we’ve had so far,’ the of Louisiana Senator added, in reference to SVB’s collapse this year.
In comments to The Financial Times, Chad Littell, an analyst at a major research firm that tracks commercial real estate, added that prominent players such as HSBC’s recent decisions to unload outstanding debts at a loss comes as a red flag.
‘The fact that banks want to sell loans is coming up in a lot of conversations,’ Littell, who works for New York-based CoStar, said Monday in a similar interview.
The finance expert further remarked of what he said is a clear sign of the bank’s determination to reduce their exposure to an increasingly unstable market: ‘I am hearing more about it than any time in the past decade.’
At the time of writing, HSBC is in the process of pawning off hundreds of millions of dollars worth of held-up commercial real estate loans potentially as a discount, as part of a burgeoning effort to wind down direct lending to property developers – who many say are poised to default come 2025.
Also taking part in this preemptive effort is PacWest, who in May unloaded $2.6illion worth of construction lending contracts at a loss.
Firms like JP Morgan Chase, meanwhile, are ordering its managers return to the office full time after years of remote work, during which most of their more than 40 US offices were left vacant despite being pair for.
‘Am I worried? The short answer is, “yes”. The long answer is, “hell yes,”‘ Senior Senate Banking Committee member John Kennedy said Monday of the looming commercial real estate crisis – an increasingly likely event that many say is the next big threat over the US economy
In comments to The Financial Times , Chad Littell, an analyst at a major research firm that tracks commercial real estate, added that prominent players such as HSBC’s recent decisions to unload outstanding debts at a loss is indicative of banks’ waning faith in property owners
The finance expert further remarked of what he said is a clear sign of the bank’s determination to reduce their exposure to an increasingly unreliable market as demand wanes and thousands of offices remain empty: ‘I am hearing more about it than any time in the past decade’
Meanwhile, higher interest rates meant to hamper inflation continue to push down property values by deterring buyers – a phenomenon compounded by the continued office vacancies
The reasoning for the decision, aired by brass in a memo obtained by the Wall Street Journal, was so staffers could be present for ‘impromptu meetings’ and that senior employees could play a more ‘critical role in reinforcing’ the banks’ work culture.
Meanwhile, a host of other banks have implemented changes that would make it easier to execute similar sales in the near future, as roughly 70 percent of bank-held commercial mortgages still sit on balance sheets of both regional and small lenders.
About $1.5 trillion worth of those loans are set to mature over the next two years – at a steep increase – due to stricter lending conditions and unsustainable rates created wrought by the Fed.
