Commercial Real Estate Prices in The US Fall for First Time since 2011

The comments below are an edited and abridged synopsis of an article by Rich Miller

In the US, commercial real estate prices fell in the first quarter for the first time in more than a decade, heightening the risk of more financial stress in the banking industry. The decline was led by drops in multifamily residences and office buildings.

Commercial Real Estate Prices in The US Fall for First Time since 2011 - BullionBuzz - Nick's Top Six
Composing with business building and stock chart (red bear chart)

This could compound the difficulties confronting many banks at a time when they are fighting to retain deposits in the face of a steep rise in interest rates over the past year.

Excluding farms and residential properties, banks accounted for more than 60% of the $3.6 trillion in commercial real estate loans outstanding in the fourth quarter of 2022, with smaller institutions particularly exposed.

The rise in employees working from home has driven some downtown retailers and restaurants out of business and forced owners of office buildings to reduce rents to retain tenants or to sell all together.

Banks held more than $700 billion in loans on office buildings and downtown retailers in the fourth quarter of last year. More than $500 billion of that was extended by smaller lenders.

Lending officers at banks tightened credit standards on commercial real estate loans in the first quarter.

There is a risk of a doom loop developing, with a pull-back in lending by banks leading to a steeper drop in commercial real estate prices, prompting even further cuts in credit.

The loan-to-value ratio of mortgages backed by office buildings and downtown retail properties was in the range of 50% to 60% on average at the end of last year for credit extended by bigger banks.

Prices are estimated to drop about 10%, assuming the US skirts a recession. If it doesn’t, the declines could get a lot worse.