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Ampersand Explains: The Commercial Real Estate Landscape in 2024

The current state of the commercial real estate market (CRE) is a hot topic. But, if you’re a business owner or corporate depositor, you likely don’t have time to untangle all the detailed terms involved to sort it all out yourself. Points of view vary from expert to expert, but it’s important that you know the facts for the sake of your business, and your deposits. 

It’s generally accepted that the challenge posed by CRE is expected to persistently strain banks, given the current environment of elevated interest rates and maturation of older loans. This means depositors need to be prepared, and understand the facts of the situation so they can better protect their deposits. 

Commercial Real Estate Loans and Interest Rates

First, let’s take a look at how CRE loans work. When a business owner secures a CRE loan, it is not the same as a residential mortgage in a few ways – such as size of loan, and loan duration. Loan durations for CRE commonly range from 5 to 10 years, yet the amortization periods frequently extend to approximately 25 years. Consequently, when a CRE loan term concludes, borrowers are faced with the necessity to either fulfill a balloon payment or secure refinancing. 

Because most CRE loans are much larger and these balloon payments are much higher, it has always been common for borrowers to refinance these loans and continue paying on them while maintaining ownership of the property. However, today this is a much harder choice. 

Considering the current scenario where interest rates have surged to two to three times their levels compared to a decade ago, those holding CRE loans maturing in 2024 are positioned to either refinance at markedly increased rates, which hampers cash flow or settle the outstanding amount in full.

The Current Issue 

Now, let’s review the current issue as a result of these loans maturing in a high rate environment.

CRE borrowers, confronted with the prospect of refinancing at substantially higher rates, might opt to let the bank seize their property instead of incurring the escalated expenses brought on by the increased rates. They might do this for a variety of reasons including being unable to afford larger payments, or inability to pass on increased costs to tenants.

Such a trend could precipitate a crisis within the banking sector, as banks find themselves holding assets that do not generate cash flow and instead incur costs. In response, banks may rush to offload these properties, frequently at a loss, resulting in an inability to recoup the full amount of the original loan.

This situation could lead to capital problems within the bank, posing risks to both shareholders and depositors. It may restrict the bank’s capacity to safeguard deposits, putting both individual and business depositors in jeopardy.

Protecting your Deposits

As a depositor, you need to be aware of what this environment means for you and your banking relationships. 

It’s vital that you take the time to assess and understand your bank’s involvement in the CRE market to gauge the security of your deposits moving forward, particularly if you hold substantial sums in a single bank. This is referred to as “concentration risk” and it’s important to remember that your deposits will only be covered up to $250,000 per tax ID per institution

Additionally, it’s important that you conduct thorough due diligence, comparing loan terms and interest rates across institutions.

If you’re concerned about the impact commercial real estate may have on your deposits, Contact Ampersand to get started.