The Covid-19 pandemic is almost over, but it is still haunting the US real estate sector and its banking system. Large office buildings, vacated soon after the outbreak of the deadly virus, remain empty as the work-from-home model is increasingly adopted, causing heavy losses to high-rise owners and making it impossible to repay bank financing.
In another crisis, the outbreak of the Russia-Ukraine war in February 2022 sent inflation soaring around the world, forcing dozens of central banks, including the US Federal Reserve, to raise interest rates to record highs. This deepened the real estate and banking crisis in the world’s largest economy, which has long been a champion of capitalism.
The financial turmoil caused by real estate has weighed on some regional and small banks in America and has also badly shaken large financial institutions, but they are believed to have survived the crisis.
The recent trouble at New York Community Bank and Japan’s Aozora Bank is fueling fears among people that some banks may have started to feel the effects of the downturn in the commercial real estate sector, it has been learnt.
New York Community Bank unexpectedly reported on Jan. 31 a loss for the fourth quarter of 2023 and cut its dividend by more than two-thirds. Its stock price fell nearly 38% that day, the biggest drop in the 30 years since it went public. The stock hit a 23-year low.
US-based global business magazine Fortune reported that some of the commercial real estate loans had been acquired by major banks such as JPMorgan, Bank of America, Wells Fargo and Citi. However, it is the primary job of regional banks, which is why the crisis is feared to hit regional banking hard.
Many commercial real estate developers and investors took out large loans after the global financial crisis in 2009 when interest rates were low, but these are maturing and due to be repaid in the coming years.
In the wake of the pandemic, many companies have adopted a completely remote or hybrid work model, which has led companies, large and small, to lose much of their office footprint. Take for example Fannie Mae and Wells Fargo, both of which recently let hundreds of thousands of square feet of office space in Washington DC and Raleigh NC, respectively, the magazine added.
Reading: The default probability is not robust: Fitch
What’s even worse than the current losses is that, according to the American Mortgage Bankers Association, commercial mortgages for hundreds of major U.S. office buildings are due this year, totaling $117 billion.
With up to $560 billion in outstanding loans by the end of 2025, these property owners may have difficulty refinancing in the current high interest rate environment. A large number of commercial properties in the United States are experiencing difficulties in repayment or refinancing, which may trigger a further banking crisis.
Federal Reserve Chairman Jerome Powell delivered further bad news to the commercial real estate industry at the Federal Open Market Committee (FOMC) meeting. While warning that a rate cut in March may not happen, the Fed removed the following sentence from the policy statement: “The US banking system is healthy and resilient.”
Skeptics say the Federal Reserve no longer believes “the US banking system is healthy and resilient” – is this a sign of the recent financial turmoil, or was it just a lie before, and now the banking dominoes are falling again.
The collapse also means that the US banking industry is no longer stable and also faces a possible systemic crisis.
Bankruptcies could put pressure on regional banks. In December 2023, US economists found that 40% of office loans on banks’ balance sheets showed negative equity, which could put pressure on dozens of regional banks that hold these loans.
In a television interview the other day, Powell said “it feels like a problem we’ll be working on for years … it’s a pretty big problem (though) manageable” that is more likely to affect smaller or regional banks.
Speaking to The Express Tribune, Pakistan-based independent analyst Adnan Agar said the US Federal Reserve had apparently delayed its first rate cut to May 2024 from the previously expected March 2024 schedule, severely affecting business and households as they relied heavily on bank financing.
He said new job openings in the US remained higher than expected without any significant impact from the high rate scenario. This situation forced the central bank to continue delaying interest rate cuts for quite some time.
The Fed is not cutting interest rates despite inflation slowing to 3.5% from a multi-decade high of 9-9.5% in the recent past. “The US usually finds inflation appropriate at 2%,” he said.
The high interest rate hits households hard. They do not pay loans, including mortgage financing, as a large number of workers in the US work for daily or weekly wages. Banks are the ultimate loser in this scenario.
The author is a staff correspondent
Published in The Express Tribune, February 12u2024.
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