While the 2008 financial crisis and its ensuing bank bailouts was triggered largely by bad loans in residential real estate, another bank crisis could be looming, but this time in the commercial real estate sector. The move to smaller office space since the pandemic and the defection of major companies out of some cities due to crime and other factors has cratered the value of large office buildings, many of which were financed years ago. As those balances come due, banks are on the hook for big losses. That has led to new concerns about how banks are preparing and warning investors about real or potential losses.
"What we have right now is about $979 billion of commercial real estate loans are going to be re-fied this year...they have to come due...and $1.6 trillion in the next two years," says Ted C. Jones, real estate economist. "And many of these properties have declined in value so much that the owner has no equity left."
A new system of rules implemented in 2020 requires banks to more accurately estimate losses over the life of a loan and report them when they are "expected." The idea was to make lenders be more transparent and avoid prettying-up ugly balance sheets until the bottom suddenly drops out. Jones doesn't foresee a repeat of the 2008 bank crash, because many large banks no longer hold many of these commercial loans. "Some regional banks do have a massive amount of commercial real estate loans compared to their equity...those are the ones that are at risk," says Jones. "So, I think what's going to happen in the next 12 to 24 months is we're going to see some regional banks fail, but not many."
"For those holding deposits in banks, just make sure your bank is FDIC insured and they're an A-rated bank with one of the rating services...and then I wouldn't look back."