Bank Exposures

US regional banks are heavily exposed to commercial real estate (CRE). The banking system is designed for this to be the case. There are very few residential mortgages on bank balance sheets in the US because Fannie Mae and Freddie Mac take them. Business loans are shorter-term and smaller in size, so it is difficult for these types of loans to take up a lot of a bank’s balance sheet. Meanwhile, consumer loans tend to be dominated by big name-brand banks like Bank of America. So most banks in America have a lot of commercial real estate exposure. Not because of a tactical market call, but because that’s what they are built to do.

Office: Not So Bad

While CRE exposures at banks are high, these are primarily multi-family real estate loans. The areas of CRE that are hopeless - like office buildings - are a small percentage of the banks’ loan portfolios. And not all office exposure is the same. Owned-occupied office, like a doctor’s office, is much less risky than an office building.

Maturities Could Be A Problem

There is not enough office exposure on bank balance sheets to be a real problem. However, there is a big maturity wall in the next 2 years across banks’ portfolios. Even though multi-family real estate is not very risky, projects that assumed interest rates would be low forever may find themselves in distress in the coming 2 years as they struggle to find refinancing options.