There is one hidden danger hanging over banks

SVB COLLAPSE: SORTING FACT FROM FICTION IN SILICON VALLEY BANK BLAME GAME

That could spell trouble for banks that sunk lots of money into commercial real estate loans over the past several years. After the collapse of Silicon Valley Bank, which parked too much of its money in bonds that lost value when interest rates climbed, experts searching for the next potentially overlooked threat have set their sights on the commercial real estate market.

“If you go back to 2021, the end of 2021, we had very low interest rates, investors had strong appetites to put money into commercial real estate and other investments, and as a result, the cap rates were low and property values were high,” Jamie Woodwell, head of commercial real estate research at the Mortgage Bankers Association, told the Washington Examiner. “In a lot of ways, we had just come through one of the greatest stress tests the commercial market could ever go through.”

The fourth quarter of 2021 saw a booming commercial real estate market and a flurry of loan activity that tied money up in buildings that, today, could be worth far less than just 18 months ago. The Federal Reserve kept interest rates near zero at the time, making commercial real estate a more attractive option for banks and investors.

Joel Griffith, senior fellow for economic policy studies at the Heritage Foundation, blamed “cheap money and excessive money printing” for the burst of commercial real estate investment.

“Why were commercial real estate values increasing at a time when we had vacancy rates increasing?” Griffith told the Washington Examiner. “That’s because of the Fed.”

Now, a timing issue could cost banks and investors billions of dollars in commercial real estate losses.

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