A crisis may be brewing in the US commercial real estate market as rising interest rates have reduced property values. This makes it harder for borrowers to refinance their loans, and some have already experienced big losses. The KKR Real Estate Finance Trust Inc. (KREF) reported a $59m loss on a Philadelphia office loan. The company had to lower its dividend by 42% to compensate for the deficit.
Is there a crisis brewing in the US real estate market?
A similar case involved New York Community Bancorp (NYCB). The company reported a loan loss provision that was 10 times higher than analysts were anticipating. The loss was $552m, and it led to shares plunging by 60%.
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The main reason for these cases is the high interest rates that the US has experienced over the past two years, as it pushes down property values by making future rentals less valuable. The drop in property values started in the office market but is spreading to apartment buildings.
Another worry is the pile of maturing loans – $929bn is due this year and $573bn next year, a third of which was already deferred from 2022. There are ways to minimise the damage though, and banks are setting aside capital and considering selling problematic loans. The question is whether there will be buyers willing to refinance that debt, and if there aren’t, where does this lead to for the US commercial real estate market?
