Ratings Downgrades Loom For U.S. Regional And Smaller Banks Exposed To Commercial Real Estate Loans

Commercial real estate loans outstanding have grown slightly over 100% in a decade. CRE borrowers took advantage of the incredibly low interest rates, an economy recovering from the Global Financial Crisis, and banks that in too many cases were less than diligent in underwriting loans. Presently, the amount of commercial real estate loans, as a percent of banks’ total loans, has grown to being slightly higher than it was in the last quarter of 2007. This worries me.

The party at the low interest rate buffet trough eventually ends in tears. We are now in a global environment of much higher interest rate environments. This means that even if the Federal Reserve Bank and other key central banks around the world pause their rate hikes, rates do not just suddenly decline. CRE borrowers will face higher borrowing costs when they must refinance in the foreseeable future.