Due to debt, mostly held by regional banks, the commercial real estate market is facing a potential Doom Loop. The cycle of defaults and bank failures is already underway in the US market, with high vacancies and falling prices.
The commercial real estate market is worth approximately $20 trillion, with approximately $3 trillion in commercial real estate debt. Selling this property could cause significant market damage, resulting in defaults and the lender's debt assets becoming worthless.
Regional banks, which are already experiencing bank runs and failures, are the major lenders in this market. In 2022, they accounted for 27% of new commercial real estate lending. While some have suggested that small local banks are at risk, regional banks are the most vulnerable in this case.
It could set off a dangerous chain reaction of debt defaults and bank failures, resulting in the Doom Loop. Commercial real estate loan defaults could lead to small bank failures, resulting in further lending restrictions, more loan defaults, and more bank failures. This cycle will continue until the market crashes completely.
This is not a hypothetical scenario; it is already taking place. The commercial real estate market in the United States has a high level of vacancies, and prices are already falling, with office space experiencing its third-worst quarter of sales volume since the financial crisis. According to JP Morgan, $38 billion in commercial real estate debt is already distressed and at risk of default, prompting a large number of investors to sell their commercial mortgage-backed securities.
As a result, the market has dropped 84.3 percent this year, as evidenced by the drop in private commercial-backed mortgage security deals. If no one purchases these securities, banks will be unable to make new mortgages, creating yet another Doom Loop.
Source:
Mark Moss, 31 March 2023, "This Data Shows Why The Banking Collapse Is Just Starting",
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