The Great Recession of 2008 is largely attributed to the collapse of the residential real estate market. The massive wave of foreclosures sent shock waves through the U.S. economy and beyond, triggering a downturn that took years to correct.
Economists now warn that a staggering $117 billion in office building loans are coming due in 2024. The indebted parties must either repay the loans in full or refinance to stay above water.
The issue is that many are believed to be at risk of default. Banks and developers would be left holding useless paper and immovable properties, putting themselves in danger of insolvency.
Could we see a recession in 2024? @SriKGlobal doesn't necessarily think it'll be a happy new year for the economy: "My expectation is that something is going to break in the system, and it still hasn't happened." pic.twitter.com/0C9ozhLnbp
— Money Movers (@moneymoverscnbc) December 26, 2023
Borrowers took out loans for millions when interest rates were only half of what they are now. There are strong possibilities that owners will not be able to refinance at the higher rates spawned by Biden’s inflationary economy.
This could launch another recession, something many fear is already set for 2024.
Manhattan leads the way with 40 major commercial loans that are due for refinancing, followed by Houston (20), Los Angeles (19) and San Francisco (18).
These loans are almost always structured to be paid interest-only. Then, at the end of the repayment period, the starting price must be paid or refinancing begins the procedure all over again.
Factor in the inevitable downsizing after many employees shifted to remote work, and many companies have less need for office space.
A December study showed that 40% of office loans found on bank balance sheets are underwater. Those making the payments and now needing to refinance owe banks more than the property is worth.
According to Moody’s Analytics, 224 of 605 loans for major office space properties expiring in the coming months will be difficult to repay or even refinance. The buildings are not generating enough income for the loans or the owners are in too much debt.
This could exact a heavy toll on smaller regional lenders. These banks may find themselves in a precarious situation if they are not large enough to absorb such losses.
The only foreseeable positive is anticipated cuts in interest rates from the Federal Reserve. The central bank is widely expected to lower the borrowing rate faster than previously forecast.
