Bank failures and looming commercial real estate debt maturity continue to generate concerns, which are justified. However, a recently released Marcus & Millichap Special Report entitled “Banking and CRE Distress” provides some context to the situation. Research experts and report writers Jessica Henn and Luke Murphy note that although current distressed CRE assets make up 1.2% of nationwide sales volume in Q4, this is still much lower than the 20.3% seen 12 quarters following the beginning of the Global Financial Crisis (GFC).
Henn and Murphy also point out that volume of maturing CRE debt is not a systemic risk due to increasingly stringent loan underwriting requirements since GFC as well as robust rent growth over term loans providing owners with sufficient equity to mitigate default risk. That being said, certain properties such as downtown offices or those with variable rate debt without hedging against interest rate increases may be predisposed towards distress sale due to cash flow challenges or higher interest payments than revenue capabilities respectively.
The authors caution against generalizations pertaining specifically regional banks managing real estate-centric portfolios; while they do hold more than half of all maturing CRE debts in 2023, most originated by smaller banks are not set for maturity this year so there should be no concern about them facing distress either way yet again pointing out how blanket generalizations can lead one astray when it comes down analyzing market conditions accurately . Furthermore , many failed banks were primary lenders for venture capital related tech firms or cryptocurrency sector rather than having sizable exposure on real estate lending .
Finally , though assets purchased between 2020 – first half 2022 with adjustable mortgages could face trouble from ongoing Federal Reserve hikes , majority held by bank have significant equity cushioning them from potential distress scenarios making it unlikely for them face any issues anytime soon .
