The bill will come due for commercial real estate mortgages, which could potentially trigger another economic recession.
Around $1.5 trillion in mortgages must be repaid in the next two years, and 70 percent of those loans are held by regional or smaller lenders, which means a write-down in commercial loans could drag down the economy heading into the 2024 presidential campaign -- and lawmakers have few options to prevent a crisis, reported Politico.
“Am I worried? The short answer is yes,” said Sen. John Kennedy (R-LA), a senior member of the Senate Banking Committee. "The long answer is hell yes. 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."
Federal policymakers raised interest rates last month by a quarter point, which puts more pressure on the real estate industry and on banks, some of which are prepared to sell off property loans for a loss to reduce their exposure in the commercial real estate market.
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“The fact that banks want to sell loans is coming up in a lot of conversations,” Chad Littell, an analyst at the research company CoStar, told the Financial Times. “I am hearing more about it than any time in the past decade.”
Federal Reserve chair Jerome Powell has tried to downplay the threat posed by the commercial real estate market, saying the banking system was “strong and resilient," but FDIC chair Martin Gruenberg said his agency was urging lenders to reduce their exposure in that sector.
“Right now, we have the double whammy of much higher interest rates and the commercial real estate market going through a shock post-COVID,” said Sen. Mark Warner (D-VA). “So I don’t think we can presume that ... we’re going to be able to simply glide through [without a crash]. I’m still trying to sort through some of the policy options. I have encouraged the White House, though, that we need to do some more intervention on these regional banks right away.”
The pandemic sent millions of workers home, and many of them remain there, and that sent office vacancy rates soaring to 18.6 percent earlier this year, and economists don't expect those rates to stabilize until next year.
"That could be a train wreck waiting to happen,” warned former top Fed official Dan Tarullo. “All you have to do is walk through the downtown of a major American city.”
The "best-case scenario" for the market would be for small number of banks with "a lot of office loan exposure" to be wiped out, according to Columbia Business School professor Stijn Van Nieuwerburgh, but he said it would be a mistake to assume the problems are isolated to the office market.
“The way these loans are structured, you’re mostly paying interest, not principal, so you have to roll over most of the loan," Van Nieuwerburgh said. “The bank will say, no, the interest rate is now 6 percent instead of 3 percent 10 years ago, which means that your building is now worth 40 percent lower.”
Sen. Jon Tester (D-MT) doesn't see the office sector recovering from the rise in remote work, so he suggested repurposing those properties for other uses.
“We are where we are, it’s going to be this way forever,” Tester said. “I think the logical solution: We need to develop policies that would help convert commercial to housing, apartments, whatever it might be.”