‘Realty’ check: $160B defaults loom

Banks are sitting on as much as $160 billion in losses on loans to the commercial real estate market as they brace for a wave of defaults from landlords in 2024, according to a report.

There is currently a 10% to 20% default rate on commercial real estate loans, equivalent to between $80 billion and $160 billion in bank losses, researchers from Columbia, Stanford, the University of Southern California and Northwestern wrote in a working paper published by the National Bureau of Economic Research this month.

The grim findings support an earlier Morgan Stanley calculation that showed lenders would need to negotiate more than $1.5 trillion of their commercial real estate portfolios by the end of 2025 to avert defaults.

Commercial real estate, the lifeblood of the lending business, now “faces a huge hurdle,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, told The New York Times in April, citing post-pandemic office vacancies and interest rates — two headwinds borrowers are still facing. Results of the NBER study were earlier reported on by the Times.

Residential real estate has been particularly volatile during this period of stubbornly-high interest and inflation, with the average rate on a 30-year mortgage climbing near 8% in late October, making it more financially sensible to rent rather than own property these days.

Commercial real estate hasn’t fared much better, as it’s still struggling to recover from the pandemic, when working from home became the new norm.