A man walks past an office building with space for rent, in Washington, March 6, 2024 (AFP/ANDREW CABALLERO-REYNOLDS)
Office buildings remain half empty in the United States, the fault of teleworking popular since the pandemic. Their value has fallen and yet the owners will have to refinance the loans, despite the high rates: this explosive cocktail, in turn, threatens certain small banks.
“There will be bank failures, but it will not be the big banks, (…) rather the small and medium-sized ones,” warned the president of the American central bank (Fed), Jerome Powell, Thursday before a committee of the Senate.
San Francisco, Washington, New York, etc.: offices in the United States see half as many people as before the pandemic. Because many white-collar workers are reluctant to repeat their long daily commute since they have become accustomed to working from home during the Covid crisis.
The vacancy rate, which was 9.5% in 2019, rose to 13.5% in 2023, and could go up to 16.6% at the end of 2025, according to the Fitch agency.
“In many cities, the downtown office district is underpopulated,” with “empty buildings,” and “all the businesses that served the thousands of people who work in these buildings are also under pressure,” he said. underlined Jerome Powell.
– 206 billion to refinance –
This desertion caused the office sector to lose a third of its value.
However, 2024 is a year of risk: a quarter of the loans taken out by owners to acquire these properties are maturing, according to figures from the Association of Real Estate Credit Institutions (MBA).
Or $206 billion to refinance. At a time when rates are at their highest in 20 years.
“Loans will have to be refinanced in an environment characterized by higher interest rates, lower valuations and rising vacancy rates,” detailed Treasury Secretary Janet Yellen.
In the United States, commercial loans must be renegotiated every three to five years.
A building with spaces for rent in Washington, March 6, 2024 (AFP/ANDREW CABALLERO-REYNOLDS)
The risk: a “chain reaction”, since banks “risk seeing their borrower default, and as a result, finding themselves with tensions on their capital”, Gregory Daco, chief economist for EY, explained to AFP Parthenon.
Joe Biden’s main economic adviser, Lael Brainard, anticipates “tensions”, but not “broader implications for the financial system”, she recently told journalists.
“Office buildings where vacancy rates are high due to changes in working methods” are “a restricted category within commercial real estate”, she underlined.
However, if large establishments have the shoulders to absorb these losses, “for small banks, it is enormous”, notes Gregory Daco.
Retirement funds or insurance companies, among others, are also concerned, as long as they have commercial buildings in their portfolios. They are even more vulnerable, because they are not subject to the same regulatory requirements as banks.
– “Domino effect” –
Jerome Powell thus clarified that the Fed works with risky establishments: “we have identified the banks which have high concentrations in commercial real estate, in particular offices and retail businesses, (…) and we are in dialogue with them”.
“If properties are sold at a lower price (…), this could trigger a domino effect, forcing banks to reassess the potential losses to which they are exposed”, and the provisions “necessary to cover them”, explains Ryan Sweet, economist for Oxford Economics.
This is one of the weaknesses that pushed New York Community Bancorp (NYCB) this week to change direction and obtain more than a billion dollars in fresh capital to get off to a good start.
The difficulties of this establishment are broader than its sole exposure to these loans, but it announced in January a provision of 185 million dollars to compensate for unpaid or late payments on its real estate loan portfolio, among others for office buildings.
And in the longer term, “if we don’t see more people returning to the office, this will become a problem,” warned Michelle Bowman, a Fed governor.
© 2024 AFP
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