Commercial Real Estate Troubles Threaten Regional Banks

Regional banks may not be out of the woods just yet.

Speaking at last week’s Bloomberg Invest conference, Soros Fund Management Chief Executive Officer Dawn Fitzpatrick warned that a credit “contraction is invariably coming” and that other banks will fold because “there are more problems under the surface,” Bloomberg News reported Friday (June 9).

As Bloomberg noted, among the problems plaguing the banking industry is commercial real estate. The work-from-home movement has slashed office values, the report said, with nearly $1.5 trillion of commercial property debt due to be repaid before the end of 2025. Meanwhile, increased interest rates have reduced the value of many properties.

The report also quotes an email from Torsten Slockchief economist at Apollo Global Management, who warned clients recently that America’s banks “have become much more vulnerable to a decline in commercial real estate prices.”

Slok also calculated that 700 banks — out of 4,700 federally insured lenders — exceeded the Federal Deposit Insurance Corp.’s (FDIC) guidance from 2006 on commercial real estate loan concentration, twice as many as there were two years ago.

This report follows a warning last month from Wells Fargo CEO Charlie Scharf, who pointed to substantial risks in the office sector.

“We look city by city, we look property by property to look at our exposures, and I would say there’s no question that there will be losses,” Scharf said.

Scharf said that his bank is proactively managing its loan portfolio while working with borrowers to restructure terms and is not “overly concentrated” in office spaces.

This news comes as business leaders are seeking to decide the question of hybrid, remote or full-time in-office employment rules. Employer plans to work from home are on a downward trend, but 13% of full-time workers are fully remote while 28% are in a hybrid setup.

PYMNTS research has found that higher-income consumers are still working from home, while low-income consumers are increasingly returning to jobs requiring them to work on-site.

High-income consumers — or those earning $100,000 per year — are 78% more likely than low-income consumers to have jobs they can do at home, according to “Digitally Divided: Work, Health and the Income Gap.”

In addition, the report found that 71% of high-income consumers — or about 45 million people — performed at least some of their duties from home.