Commercial real estate is the next victim of the credit crunch
Elevated rates, vacant properties, and now lenders are going belly up — the noose around commercial real estate is tightening.
Dear readers,
Banks are capital allocators. They take in deposits and use them to purchase securities and write loans. But what happens when banks stop dealing with one another and instead they go to the Fed for their funding needs—as has been the case over the last three weeks? They back away from extending credit to consumers and writing loans to businesses and property developers—a credit crunch ensues.
With bank failures tightening loan standards for commercial real estate, rising office vacancies cutting off revenue, and a maturity wall approaching when developers will either have to refinance at a staggeringly high rate or default, the stage is set for a crash in America’s commercial real estate market, again.
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Banks are failing and backing away from lending to commercial real estate
As part of their activities, banks lend to property developers that show promise of generating a positive return on capital. As banks lose deposits though, their ability to finance real estate falls—small banks just had their largest single week of deposit outflows since 2007, a massive headwind for loan creation:
With deposit outflows tightening credit availability for consumers, businesses, and property developers alike, commercial real estate (CRE) lending is projected to decline by as much as 40% this year—banks have already begun reducing their lending: