US Commercial Real Estate Loans with $2 Trillion Maturing in 5 Years... A Financial Market Time Bomb?

Non-performing Loans Increase for 4 Consecutive Quarters
High Interest Rates Raise Loan Repayment Burden
Risk of Crisis Spreading to Small and Medium Banks

Among commercial real estate mortgage loans in the United States, loans maturing within five years amount to $2.7 trillion (approximately 3,479.76 trillion KRW). As the volume of non-performing loans has increased for four consecutive quarters, concerns are growing that the commercial real estate market could become another trigger for a financial crisis in the U.S. financial sector, which has only just stabilized.

Office building complex in New York, USA
Photo by AP Yonhap News

On the 2nd, the Nihon Keizai Shimbun cited statistics from U.S. real estate information company Trepp, reporting that the volume of commercial real estate mortgage loans maturing by 2027 reaches $2.7 trillion.

Most of the loans reaching maturity were funds borrowed for real estate investment during a period of low interest rates lasting over a decade. Manus Klan, Managing Director of Trepp, explained, "Borrowers who took out loans at interest rates in the 4% range about ten years ago are very likely now to be paying interest rates in the 8% range due to the Federal Reserve's rate hikes."

The balance of non-performing commercial mortgage loans also reached $71.8 billion at the end of last month, marking an increase for four consecutive quarters. Following the sharp rise in vacancy rates after COVID-19, the appraisal value of commercial buildings declined, and with soaring interest rates, more borrowers are struggling with repayments. Loans estimated to have a high likelihood of becoming non-performing in the future amount to $162.3 billion, suggesting that the shock to the real estate market could be significant.

There are growing concerns in the market that the adverse conditions in the commercial real estate market could spread into a crisis for small and medium-sized U.S. banks. According to the Fed, U.S. small and medium-sized banks hold half of the total commercial real estate loan balances. Commercial real estate loans account for 13% of these banks' assets.

In response, some financial institutions, fearing a surge in loan delinquencies, have begun selling loan receivables at bargain prices. On May 26, U.S. regional bank PacWest sold $2.6 billion in real estate loan receivables at a loss. The U.S. branch of the British major bank HSBC also decided to sell several hundred million dollars worth of commercial real estate loan receivables at about a 5% discount to their value. Regional bank Webster Financial reduced the proportion of commercial real estate loans by 25% by selling $80 million worth of bonds in the second quarter.

As U.S. commercial real estate shows signs of collapse and the risk of transmission to the financial sector increases, financial authorities are closely monitoring the situation. Fed Chair Jerome Powell, attending the European Central Bank (ECB) forum in June, stated, "While large banks do not have a high concentration in commercial real estate, banks with assets under $100 billion have surprisingly large commercial real estate exposures," adding, "We will closely monitor bank supervision."

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