According to a recent Bank of America survey, fund managers are expressing growing concerns over potential trouble in the commercial real estate sector that could potentially lead to a credit crisis in the United States. In February, 16% of survey participants identified a "systemic credit event" as the top risk to markets, up from 11% the previous month. This marked the third-largest tail risk for markets, behind sticky inflation and geopolitics.
The commercial real estate market is seen as the most likely source of a credit event, with other possible sources including shadow banking and U.S. corporate debt. Approximately $1.5 trillion in commercial mortgage debt is due by the end of 2025, but factors such as steeper borrowing costs, tighter credit conditions, and a decline in property values due to remote work have increased the risk of default.
Regional banks, which hold about 80% of the commercial real estate sector's outstanding debt, are a major source of credit for the industry. Concerns have been raised about the potential for lending standards to become drastically more restrictive, especially following the recent collapse of Silicon Valley Bank.
Treasury Secretary Janet Yellen has acknowledged the challenges within the commercial real estate sector but has sought to downplay the potential impact on the banking system. During a recent Senate Finance Committee hearing, Yellen stated that while there may be additional bank stress and financial losses due to weaknesses in the sector, she does not believe it will pose a systemic risk to the banking system. However, she did note that smaller banks may be more vulnerable to the developments.
Overall, the growing concerns among fund managers and the potential risks posed by the commercial real estate market are issues that are being closely monitored by experts and policymakers. The impact of these challenges on the broader economy remains to be seen, but it is clear that attention is being paid to the potential for a credit crisis in the U.S.