U.S. Banks Grapple with Soaring Office Vacancies

This commentary reviews U.S. banks' handling of commercial real estate (CRE) office loans.

Key highlights include:

-- The U.S. CRE office sector is grappling with high vacancy rates and falling property values due to macroeconomic conditions and remote work adoption.

-- U.S. banks maintain a manageable stance with risk-mitigation, bolstered reserve levels, and diversified loan portfolios with the median office loan holdings for DBRS Morningstar rated U.S. GSIBs standing at about $12.6 billion.

-- Federal Reserve stress tests reveal banks' resilience, simulating harsh conditions with a 40% drop in CRE prices, signifying a robust capital footing amidst potential significant losses.

“In the near term, we expect more challenges as the demand for office space continues to dwindle while refinancing will be harder for investors because of increasing interest rates and banks requiring additional equity or collateral to renew loans given falling appraisal values,” said Mindula Suriyabandara, Analyst, Credit Ratings - NA FIG.