Why we should always care about billions in business actual property loans
Posted On March 29, 2023
MINNEAPOLIS — Between bank collapses, soaring interest rates and people rethinking where they live, work and spend their money, soaring skyscrapers are not worth what they used to be.
Commercial real estate is usually strapped with debt that’s owed, in particular, to smaller and regional banks and if office building owners start missing payments, it can increase the fragility of the entire banking system.
Experts say that billions of dollars in commercial real estate loans are due this year.
Commercial real estate is defined in four ways: industrial, multi-family, retail and office space — the last of which, has hit a wall, according to Xander Snyder, a senior commercial real estate economist for First American Financial Corporation.
“I certainly think it’s something people are keeping their eye on,” said Snyder.
He’ll tell you the industry had thrived, in part, due to low interest rates which have now bloomed to some 7%. That’s making refinancing a rocky move and shrinking the value of some office buildings.
“You’re combining higher interest rates, higher debt service costs, with emptier buildings and lower cash flow,” said Snyder. “It’s not a great combination.”
Office buildings are worth so much less, that on one Minnetonka street alone, there are five commercial properties for lease. It’s a trend that started during the pandemic and it’s hitting several major Minnesota employers.
It includes Thomson Reuters that’s selling a majority of its Eagan campus due to “changing workplace habits,” along with Blue Cross and Blue Shield of Minnesota. A spokesperson told KARE 11 on Tuesday that it’s closing its main building as it moves to a hybrid work model.
“If your office is not being utilized, then arguably that’s an expense you don’t want to take,” said Snyder, who says there’s nearly $200 billion worth of office loans about to be due this year. If owners go into foreclosure, it puts stress on banks, particularly smaller ones, that have a high concentration of commercial real estate loans.
Snyder says consumers should care about this news because stress could put a strain on certain banks.
“If the bank is unable to recoup the value of its loans because the value of the collateral has fallen so significantly, then the bank is looking at the risk of impairments,” said Snyder. “You want your bank to be on sound financial footing.”
Snyder says he doesn’t expect a run on banks or a full-on collapse like in 2008. That’s, in part, to regulations like the Dodd-Frank Act that prevents excessive risk-taking and requires more transparency.
But due to the fallout recently of some banks, like Silicon Valley, other banks are being investigated.
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