Commercial real estate crash sparks bank collapse fears

As commercial real estate failure continues to loom in the U.S., some have brought up concerns regarding how this could result in the collapse of some banks.

In a series of tweets on Monday, Nick Gerli, the CEO of Reventure Consulting, detailed how “the commercial real estate crash is happening” and how it could impact small banks across the nation. While speaking with Newsweek on Monday, Gerli explained that commercial real estate owners are currently facing a “double-pronged issue” due to rising interest rates and a decline in revenue in properties.

“Values for office, retail, and apartment buildings are already down -11%. Morgan Stanley thinks values could crash -40% when all is said and done. Big problem for US Economy,” Gerli wrote in his tweet.

The tweets by Gerli come amid ongoing concerns about the current state of the commercial real estate market. Last week, Fox Business News reported that by 2025, over $1 trillion worth of commercial mortgage debt is due, but many have concerns that this debt might go into default amid declining property values and high borrowing prices.

In his tweets, Gerli explained that office buildings as well as apartment buildings are facing declining property values. In the case of office buildings, this is mainly due to the COVID-19 forcing many Americans to work from home instead of in an office.

“Now here’s where things get interesting…who holds all this debt on declining commercial real estate?” Gerli wrote in a tweet. “Mostly banks. And small banks to be specific. Small banks hold a massive $1.9 trillion in CRE debt in 2023 (way more than large banks).”

“In the case of office buildings, it’s [revenue] going down by a lot,” Gerli told Newsweek. “And even in the case of apartment buildings, revenue is starting to go down because rental rates are declining and vacancy rates are going up. It’s like a double whammy for the commercial property owner. Rising rates, declining revenues.”

Gerli went on to explain that many small regional banks over the past five years have taken on large commercial real estate loans.

“As more of these commercial loans go into default, [banks] have to take them over and foreclose them, they’re gonna have to write down these values, and it’s going to have to force them to book losses on their income statement and balance sheet,” Gerli told Newsweek. “Ultimately, that could scare depositors at these banks.”

According to Gerli, it is currently unclear exactly why some regional banks have taken on commercial real estate loans, but he said that it could be due to an “expansion mindset,” to continue growing the size of the bank and increase interest revenue.

Earlier this year, the Silicon Valley Bank collapsed prompting concerns among depositors as well as the possibility of a more widespread economic collapse. Gerli told Newsweek that the current state of the commercial real estate market shows that “this banking issue that started earlier this year is not over.”

“There’s more stuff coming down the pike here. It might take multiple years for it to play out but ultimately it’s likely gonna cause a credit crunch for the economy or banks because they’re taking so many losses with these loans,” Gerli told Newsweek.

Newsweek reached out to the Federal Reserve via email for comment.