The collapse in office-property prices will have plenty of knock-on consequences — few of them pleasant — and that includes the effect on the banks that have lent to the owners and/or developers of office buildings.
High interest rates and falling corporate real estate prices pose a serious risk to the US banking system, the International Monetary Fund has said, as it warned of the prospect of looming bank failures.
As a reminder, interest rates are not particularly high, but they are a lot higher than they were a few years ago, when, thanks primarily to state intervention, they had fallen (on some calculations) to four-thousand-year lows. Mispriced, ultra-cheap money resulted (as mispriced money will tend to do) in severe misallocations of capital. Buildings were built that should not have been built and sold at prices that should not have been paid. Throw in the effects of working from home (something that will be bolstered by the introduction of an astonishingly ill-conceived “congestion” charge in New York City, one of the locations that will be most severely hit by the collapse in the office-property market) and then add, in certain markets (including NYC), the impact of retroactive “net zero” regulations on buildings, and things look pretty grim. “Retroactive” regulations? Yes, in this context, that’s what an obligation to retrofit buildings amounts to. And for embattled building owners it will be a disaster.
Back to the Times:
On the anniversary of the collapse of Silicon Valley Bank, the IMF has rung the alarm bell over the risks of another round of bank failures triggered by the worst fall in commercial property values in half a century in the world’s largest economy.
“The high concentration of corporate real estate exposures represents a serious risk to small and large banks amid economic uncertainty and higher interest rates, potentially declining property values, and asset quality deterioration,” the IMF said in an analysis of financial stability risks a year on from SVB’s failure. . . .
Financial stability concerns have returned to parts of the banking system in recent weeks after the regional lender New York Community Bancorp lost a quarter of its share price value after reporting losses tied up to its exposure to corporate real estate. Banks are having to set aside larger amounts of cash to protect themselves against bad loans, with lenders “anticipating additional defaults”, the IMF said.