Commercial Real Estate Downturn Could Trigger Bank Failures

According to Joshua Pack, co-CEO of Fortress Investment Group, the anticipated downturn in the commercial real estate market is expected to result in a wave of bank failures and forced mergers. Pack foresees a "multi-trillion-dollar problem," particularly impacting smaller banks that aggressively increased commercial real estate lending during the pandemic. Over $900 billion in loans on commercial and multifamily properties are set to need refinancing or property sales in 2024, creating challenges for banks as property values decline and borrowing costs rise.

Pack warns that this situation could lead to the consolidation and liquidation of US banks, stating, "A lot more eggs are going to get broken." The crisis is not limited to banks, as Pack estimates around a trillion dollars of commercial mortgage-backed securities (CMBS) loans will mature by 2025. With falling property values, borrowers may face defaults when the loan exceeds the current property value.

Fortress Investment Group has already taken advantage of the situation by acquiring office loans at steep discounts. Pack mentioned that banks are selling at these discounted prices to minimise losses and mitigate potential further declines in property values. Despite a reluctance from the Federal Deposit Insurance Corporation (FDIC) to sell to firms like Fortress, Pack believes that regulators will eventually have to involve private capital to address the significant challenges in the commercial real estate market.

"The underlying stress here is just so big—it's a multi-trillion-dollar problem," Pack stated, indicating that regulators might have to turn to private capital to assist in cleaning up the aftermath and recapitalizing the system.