The scale of distressed assets in the U.S. commercial real estate market has surpassed $200 billion, raising concerns about a potential financial crisis. The decline in office building prices, driven by rent reductions due to the spread of remote work and diminished investment appeal amid high interest rates, has heightened fears of defaults. There are worries that cases similar to the U.S. regional bank New York Community Bancorp (NYCB), whose stock price halved in two days due to the commercial real estate crisis, could occur anywhere.
According to Morgan Stanley Capital International (MSCI) Real Asset on the 14th (local time), the amount of distressed U.S. commercial real estate reached $235 billion by last year. Office distressed assets ranked first at $55 billion, followed by apartments ($67 billion), hotels ($36 billion), and retail stores ($35 billion).
Over the past decade of sustained low interest rates, U.S. commercial real estate has been regarded as a safe asset among global investors. However, the crisis has spread to office assets, where vacancy rates have surged due to high interest rates triggered by inflation and the expansion of remote work culture. According to Moody’s Analytics, the U.S. office vacancy rate in the fourth quarter of last year reached a record high of 19.6%.
Commercial building prices continue to decline. This is because property owners with deteriorating profitability are putting their properties on the market at low prices. According to MSCI Real Asset, as of the fourth quarter of last year, building prices in San Francisco, popular among tech companies, plummeted 39.9% year-over-year, ranking first in decline. Following that, Manhattan and Boston also fell by 15.4% and 13.2%, respectively.
This has increased concerns that property owners may be unable to repay loans when commercial real estate loan maturities come due. According to real estate research firm Trepp, more than $1 trillion in commercial real estate loans are set to mature by the end of next year. Commercial real estate loan maturities typically come due in 5- or 10-year terms, at which point borrowers must repay or refinance at much higher interest rates.
Some analysts suggest that the NYCB stock crash last month is only the beginning of the commercial real estate crisis. On the 31st of last month, NYCB’s stock price plunged 50% in two days after it confirmed in its fourth-quarter earnings report that it had written off a total of $185 million from two commercial real estate loans last year. A write-off refers to the accounting recognition of a decrease in the value of tangible assets over time. This indicated the possibility that loans to commercial real estate owners might not be recovered.
The problem is that the commercial real estate crisis could have a greater impact on small- and medium-sized regional banks. Seventy percent of commercial real estate loans maturing by 2025 originated from regional banks. US Bancorp, the largest regional bank by assets, announced that it increased its allowance for credit losses by 28% ($111 million) in the fourth quarter of last year compared to the same period a year earlier. This was intended to cover potential commercial real estate losses.
Morgan Stanley pointed out that for regional banks, the risk could increase further due to rising debt costs amid changing regulatory environments. Since the U.S. financial authorities began applying strict capital regulations not only to large banks but also to medium-sized banks following the Silicon Valley Bank (SVB) collapse last year, the burden of fixed costs has increased.
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