Morgan Stanley: Why The Commercial Real Estate Crisis Will Be With Us For A Long Time

By Vishwanath Tirupattur, global head of Quantitative Research at Morgan Stanley

Commercial real estate (CRE) is back in the spotlight in the aftermath of the loan losses, reserve build, and dividend cuts announced by New York Community Bancorp (NYCB), a regional bank that primarily focuses on rent-stabilized multifamily and CRE lending in the New York metro area. Lenders and investors in Japan, Germany, and Canada have also reported sizable credit losses or write-downs related to US CRE. Government officials ranging from Treasury Secretary Yellen and Fed Chair Powell to other central bank officials on both sides of the Atlantic have expressed concerns about the financial stability risks emanating from CRE losses. The challenges in CRE have been on a slow burn for several quarters. In our view, the CRE issues should be scrutinized through the lenses of lenders and property types. We see meaningful challenges in both.

From the lenders’ perspective, we estimate that about US$2 trillion of CRE debt matures by the end of 2025 and needs to be refinanced, half of which is on bank balance sheets. Our work indicates that the top 25 banks have about 30% of this exposure and the rest of the 4,500+ smaller, regional banks have the remaining 70%. Further, as a proportion of the total loan books, the top-25 banks' exposure to CRE is only 11% versus 34% for the regional banks. In essence, the CRE challenge for the banking sector is a regional bank issue. We highlight key aspects of the CRE debt held on regional bank balance sheets: