Even before the collapse of Silicon Valley Bank, the outlook for parts of the CRE market appeared dim. Now with lending standards growing tighter, investors are getting increasingly nervous about problematic properties lurking on bank balance sheets.
Banks, especially small regional names in the US, have substantial exposure to the CRE market. Within banks’ CRE portfolios, exposure to higher risk subcategories (retail, office, construction/development) is greater at the regional banks than the megabanks.
Interest rates are high, which can make refinancing uneconomical, even for properties that are still performing well. This means some leading major real estate investors are likely to “turn in the keys” and hand properties back to the lenders. As these strategic defaults pick up, banks will face losses.
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