Over the past few days, a ton of bank quarterly earnings have been released again, mostly from the larger banks, but mostly from the much larger regional banks.
But things aren't looking much better. High interest rates are eating into profits, and the Federal Reserve has warned that they're likely to remain high for some time to come. On Thursday, three companies reported declines in net income: KeyCorp, Comerica and Ally. On Wednesday, U.S. Bancorp and Citizens Financial did the same.
Weighing on the sector is commercial real estate, as these banks are burdened with piles of CRE loans hit by the double whammy of high interest rates and high office vacancies due to the pandemic-era shift to remote work.
Further evidence of the trend from ATTOM, which tracks real estate data across the country, shows that commercial real estate foreclosures increased by more than 100% from March 2023 to March 2024 – 117% to be exact.
There are four types of commercial real estate — industrial, retail, multifamily and office — and it's clear which type is the weakest, says Morningstar's Sri Sharma. “The real stress is in offices, there's no question about that,” he says.
How stressed are you?
“Commercial office space is in a deep downturn, tested by the extreme decline of the 2007 and 2008 financial crisis,” said Susan Wachter, a real estate professor at the Wharton School of the University of Pennsylvania.
“This is a crisis,” she said, “but it is a contained crisis, one that will develop slowly. With no interest rate spikes, no recession, and continued strong growth, the pain across the economy will be limited.”
But not for building owners who are struggling with half-empty office buildings and not enough rent coming in to pay off their bank loans.
Morningstar's Sharma said the largest banks should be fine, but smaller regional banks may have 40% to 50% of their portfolios invested in commercial real estate.
“So if things go wrong it's very likely that some of these banks will fail in Australia,” he said.
Commercial real estate now includes industrial property, and Ken Simonson, chief economist for the National Association of General Contractors, said industrial property prices are soaring.
“There's a lot of growth in data centers, manufacturing plants and infrastructure, and there's a lot of renewable power projects, from solar to battery storage and even offshore wind,” he said.
As for retail, Sharma said it's doing pretty well, and a huge wave of new apartment complexes is about to hit the market.
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