Commercial real estate’s link to smaller banks in the U.S. is vulnerable and has not gotten enough attention after recent strain in the banking system, according to Capital Economics.
“But in a worst case scenario it’s possible that a ‘doom loop’ develops between smaller banks and commercial property, in which concerns about the health of these banks leads to deposit flight,” warned Shearing. That, in turn, would cause “banks to call in commercial real estate loans, which then accelerates a downturn in a sector that forms a key part of its asset base, which intensifies concerns about the health of the banks and thus completes the vicious cycle.
Pullback in lending? The commercial real-estate market includes industrial and retail properties as well as offices and apartments, according to Capital Economics. In Shearing’s view, lending to commercial real estate may tighten as smaller banks experience pressure on their deposit base following the run on failed Silicon Valley Bank earlier this month.
Commercial-property lending accounts for about 40% of all loans by smaller U.S. banks, according to Capital Economics. Smaller U.S. banks are those defined by the Federal Reserve as being outside the 25 biggest by asset size, the note says.
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