Heightening risk of US market recession: commercial real estate, money drying up, cause of loan decline.

Banks Retreat from Commercial Real Estate Loans in First Two Weeks of October
Second Quarter Overall Commercial Loan Growth Rate Lowest Since 2014
Concerns over Serial Defaults Intensify
New Projects Affected Despite Commencement

The U.S. commercial real estate market is facing heightened risks of a slowdown, including a series of defaults and construction halts, as the flow of funds comes to a standstill.

The Wall Street Journal (WSJ) reported on the 31st (local time) that the size of commercial real estate loans by banks decreased in the first two weeks of last month, citing data provider Trepp. This is only the second time since 2014 that banks’ commercial real estate loans have decreased.

Not only banks but also other lenders are retreating. Loans converted into commercial mortgage-backed securities this year amounted to $28.2 billion, the lowest since 2011. Furthermore, major U.S. mortgage real estate investment trusts (REITs), Blackstone Mortgage Trust and KKR Real Estate Finance Trust, have halted loans to new borrowers this year.

The total size of commercial real estate loans from banks and insurance companies to commercial mortgage securities increased by only 0.98% compared to the previous quarter in the second quarter. Matt Anderson, an executive at Trepp, described it as “the lowest growth rate since the first quarter of 2014.”

Financial institutions began to reduce the size of commercial real estate loans from the first half of last year when the U.S. Federal Reserve (Fed) began aggressive interest rate hikes. This year, smaller banks like Silicon Valley Bank (SVB) have become more reluctant to lend after a series of bankruptcies due to depositor flight and bad commercial real estate loans. The reluctance to new loans has become more apparent as U.S. long-term interest rates have surged.

Michael Levy, CEO of Crow Holdings, one of the largest developers of rental apartments and industrial buildings in the U.S., said, “The rise in 10-year U.S. Treasury yields has unsettled the market,” and “the instability in the capital market is crushing everyone.”

With the situation as it is, voices of concern over an increase in defaults and negative effects on new construction are growing in the market. Many banks are already facing an increase in bad commercial real estate loans. PNC Financial Group announced that the size of its bad commercial real estate loans in the third quarter reached $723 million, more than twice the previous quarter. The company stated, “The pressure we feared in the commercial real estate sector is starting to materialize.”

The construction sector has been hit hard by the sharp decline in commercial real estate loans. Analyst firm Dodge Construction Network estimated this year’s U.S. commercial real estate construction volume to be about 936 million square feet, a 17% decrease from last year. This is the largest annual decrease since the global financial crisis in 2009.

The $650 million hotel-casino construction project ‘Dream Las Vegas’, which began early last year, was halted earlier this year due to funding issues. Park Tigpen, head of global real estate at law firm King & Spalding, said, “We have 46 commercial real estate projects that are either completed or were in progress by the first quarter of next year,” and “All of them are being postponed or pushed back due to funding issues.”