In the United States, commercial real estate includes several categories of property: office buildings, shopping centers and premises, hotels and hotel residences, data centers and multifamily properties. The latter include buildings designed to accommodate several tenants for exclusively rental use, such as student residences or private nursing homes. Not all of these sectors are affected in the same way by the drop in prices.

Data centers and hotels are doing well, while the multifamily market is experiencing a slight decline that is out of all proportion to the crisis affecting office real estate. Lockdowns and travel restrictions forced workers to adopt new habits, revealing the benefits of remote work. After the crisis, many office tenants left large buildings and did not return, causing demand for office real estate to decline by 30%, or even 70% in San Francisco, with no return to pre-crisis levels.

This phenomenon affects all major cities, causing a sharp drop in revenues for managers like Columbia-PIMCO or Boston Properties. Offices have lost their appeal in favor of teleworking, which is less expensive for employers. Commercial premises have also been deserted due to the health crisis, with many ruined traders never returning. In addition, the rise in FED key rates has pushed up borrowing costs, while banks have tightened their credit conditions, requiring more contributions and guarantees.

Shortages and inflation have increased the cost of maintaining properties, sometimes making it more advantageous for a struggling owner to let his lender manage an empty and expensive to maintain property. Let’s continue, these real estate properties were obviously not paid for in full, but financed by specific bank loans secured by commercial mortgages. Not all are affected by the drop in prices! These loans secured by commercial mortgages have been transformed into tradable products called CMBS (Commercial Mortgage-Backed Securities). 

To free up liquidity, these CMBS, which are in fact well-structured sets of commercial real estate loans, are sold in batches like shares and listed on secondary markets. Doesn’t that remind you of anything? (SUBPRIMES). Let’s go further. According to analysts at « Morgan Stanley », American developers have accumulated a debt of 2.9 trillion dollars and, faced with the decline in their revenues, the value of their assets and their liquidity, half of it will have to be refinanced in the next two years to avoid cascading defaults.

So it is the American banks that will have to absorb the coming shock! According to the Fed’s statements, only 20% of CMBS are held by the 23 largest American banks. According to Moody’s Analytics, they could lose nearly $65 billion together if prices plummeted by 40%! This seems huge and unenviable for the creditors holding the remaining 80%.

But the latter have also been in difficulty for months: this 80% is held by the regional banks. With the end of 0% rates and easy money, the American regional banks are already suffering from the brutal erosion of their margins, the fall in credits granted, the loss of confidence of their customers who are massively withdrawing their money, and finally a dollar crisis aggravated by a general climate of distrust concerning the American federal debt.

Since the beginning of 2023, regional bankruptcies have followed one another, forcing the State and major banks to intervene to prevent the crisis from spreading to other institutions or sectors. The banking sector remains fragile, especially with the office real estate crisis starting to be felt, leading to a devaluation of commercial mortgage guarantees. In 2023, 20 billion of loans backed by these depreciated guarantees will mature, of which 12.7 billion are already in difficulty. 

This represents 5.5 billion more than in the same period in 2022, more than half of which is related to the financing of office buildings. In May 2023, more than a third of the maturities have been renegotiated, and the sector forecasts a default rate of 6% by the end of the year, compared to 4% currently. For comparison, in 2008, at the height of the financial crisis, the default rate reached 10%, causing the fall of giants such as Bear Stearns and Lehman Brothers. 

This time, regional banks are even less well prepared to face such a storm. It is therefore reasonable to fear a new series of bankruptcies of American banks, similar to that of March 2023. Let us recall the bankruptcies of Silvergate Bank, Silicon Valley Bank and Signature Bank, which almost took down American and European banking stocks, including Credit Suisse, saved in extremis by its acquisition by UBS.

The coming months will be decisive for the surviving banks, which will have to renegotiate their receivables to minimize losses. According to a report by the McKinsey Global Institute published on July 13, 2023, entitled « The latest impacts of the pandemic on commercial real estate », other strategies can be implemented to reduce losses and adapt the sector to new working habits. It is advisable to seek equity, which is particularly difficult in the current context.

Obtaining fresh money often requires selling assets, but the value of these assets is now insufficient to cover the loans, which encourages developers to sell their assets to creditors. Banks then have two choices: sell the properties at market price, which could lead to a partial loss of the loaned capital and accentuate the fall in prices, or entrust the properties to property management experts to try to increase their value.

Currently, banks are finding solutions with investment funds such as « PIMCO », owned by « BIG TREE », which are taking advantage of the situation by buying at 20% discounts, with the idea of transforming office buildings into residential housing. This idea, also supported by analysts from the « Financial Times », however, often encounters obstacles related to local regulations and requires legislative changes, a long process. 

In the longer term, it would be preferable for developers to design hybrid buildings, easily transformable at a lower cost to adapt to new working methods. However, there is a lack of innovation on the part of the players and banks are reluctant to take risks. Currently, the situation remains worrying.