Some US banks are facing ongoing challenges, especially those with significant exposure to commercial real estate (CRE). The office sector, in particular, has been under market stress. While the credit risk associated with CRE has remained stable thus far, declining market valuations have led to stricter lending standards, particularly for smaller banks in the US that hold a large portion of CRE loans. Additionally, credit demand has weakened noticeably.
The risks associated with CRE extend beyond the banking sector. Fixed-income public markets related to CRE have already experienced corrections of around 20-30%, with varying degrees of impact depending on credit quality. Similarly, equities related to CRE have declined in value, and Real Estate Investment Trusts (REITs), despite being more liquid, have experienced sell-offs due to redemption pressures from investors.
The increasing impact of CRE losses highlights the need for heightened scrutiny. If impairments of CRE exposures continue to rise and weigh on solvency, it could further restrict lending activity and complicate the Federal Reserve’s efforts to maintain a restrictive monetary stance. Such an adverse scenario may also test policymakers’ resolve to shore up investor confidence, especially if more banks report rising unrealized losses from fixed-income holdings.