Concerns Grow as Tighter Lending Threatens Commercial Real Estate
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.
Mr. Seru did not blame the Fed, however, saying it had “no choice but to raise rates” to tackle inflation, though he admitted the central bank did make a “complex situation more complex.”
Article source: https://www.nytimes.com/2023/04/06/business/commercial-real-estate-lending.html