The Larger Hidden Risk To The Market After SVB

The start of a financial crisis is like finding rotting food in your fridge. Something starts to smell, and you think you know what’s rotting, but when you investigate you find something that’s much worse at the very back of the fridge that you hadn’t thought about in weeks. This may just be my fridge, but you get the analogy. Commercial real estate loans, sitting at midsize banks throughout the US, are the hidden problem we are all starting to remember.

Commercial real estate loans in the US are approaching $2.9 trillion as per the St. Louis Fed, and an outsized proportion sits at regional banks. In the years following the Global Financial Crisis, regional banks leaned into commercial real estate lending. It was a place to deploy capital that didn’t require significant tech investment or massive teams, and for the loans on assets in their region, they could argue they had more underwriting expertise and could compete on cost. This part of the economy is now under significant pressure while these same banks are fighting a larger battle around deposit levels.