Analysts Warn of Pending Crisis in Commercial Real Estate Market

The turmoil that drove Silicon Valley Bank and Signature Bank out of business, rocking the wider banking sector, has analysts bracing for the next possible crisis: the $20 trillion commercial real estate market.

The bank failures brought new scrutiny to other regional banks, which provide the bulk of commercial real estate loans. Those loans are then repackaged into complex financial products for investors in wider markets. And the outlook for the industry appears stark, market watchers say.

Commercial real estate, the lifeblood of the lending business for regional banks, now “faces a huge hurdle,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, warned investors in April, adding to a growing chorus that has been expressing concerns about the industry’s looming challenges. Critics say the sector is precarious thanks to a potentially toxic cocktail of postpandemic office vacancies, rising interest rates and a mass refinancing of mortgages that lies ahead.

Cities across the United States had been experiencing a plunge in demand for office space that accelerated during the height of the pandemic, and many were still struggling to bounce back, according to the National Association of Realtors, a trade group. The bigger the city, the larger the decline, which has added up to a 12 percent office vacancy rate in the United States, from 9.5 percent in 2019.

“Remote and hybrid work, layoffs and higher interest rates further increased office space availability in the market,” the group wrote.

The debt on those office buildings will soon come due, whether or not the spaces are full. More than half of the $2.9 trillion in commercial mortgages will need to be renegotiated by the end of 2025. Local and regional banks are on the hook for most of those loans — nearly 70 percent, according to estimates from Bank of America and Goldman Sachs.

And interest rates are expected to continue to rise as much as 4.5 percentage points, according to Morgan Stanley. That debt load will weigh on businesses as low occupancy rates put pressure on property values.

The effect is likely to put a chill on lending, experts say, which will make it harder for developers to borrow money to build shopping malls and office towers and could spill over into wider markets.

“We are reluctant to declare ‘all clear’ on recent regional banking stress,” Candace Browning, who heads global research at Bank of America, wrote in a recent report.

The economic impact is vast. Even as it struggled with the effects of pandemic restrictions, commercial real estate — which includes office buildings, shopping malls and warehouses — contributed $2.3 trillion to the U.S. economy last year, an industry association calculated.

Critics say that, with parts of the banking sector so fragile, the Federal Reserve should rethink its aggressive monetary policy, which has included nine interest rate increases since March 2022. The high price of refinancing commercial real estate loans in coming years will “likely lead to the next major crisis,” the Kobeissi Letter, a newsletter that covers the economy and markets, wrote on Twitter last week, adding that “the Fed plays a major role.”

So far, the Fed is unswayed: At least one more rate increase is in the cards this year.

Still, the criticism is not limited to the central bank; poor risk management was also to blame, some say. Silicon Valley Bank, for example, ignored warnings from bank regulators. The bank was invested in government bonds that would have been more valuable if they were held to maturity — but when clients began withdrawing funds rapidly, the bank was forced to sell those assets at a reduced value to meet the demand for cash.

Silicon Valley Bank was not alone in its approach. A National Bureau of Economic Research paper that tracked bank asset values as interest rates rose last year found that banks across the country hold a total market value that is $2 trillion lower than what’s reflected on their books. This suggests that many banks are already taking unnecessary risks and may struggle as economic conditions tighten, said Amit Seru, a professor at Stanford Business School and one of the paper’s researchers.

Ephrat Livni is a reporter with The New York Times. Copyright 2023, The New York Times.


  1. You think? I called this a “massive heart attack” in commercial real estate 3 years ago when whatever it was that motivated everyone to go crazy and say nonsensical things about viruses and how you can control them. You don’t needlessly and fruitlessly shut people out of commercial business space for years on end and not expect to have any negative consequences do you? And when we had the chance to vote to start fixing the problem we did nothing at all. Enjoy your self-inflicted train wreck, everyone.

  2. Just an Observation,

    Remember rental units are commercial units too. And the drop of commercial units has a parity impact on residential units.

    The downtown Westfield Mall is at good risk of closing

    The entire house of cards is falling, but it is so big, it takes time. And the Fed is not going to lower interest rates for the next 2 years.

    More losses are coming

  3. The analysis underscores the current vulnerabilities faced by office spaces and retail establishments, exacerbated by evolving work dynamics and consumer behaviors. The observations raise concerns about the future landscape of commercial properties and their adaptability. It begs the question: How can stakeholders in commercial real estate navigate this shifting landscape to mitigate potential crises and adapt to the changing needs of businesses and consumers?

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