BOCA RATON, Fla. — A new study by Florida Atlantic University found that sinking demand for office space in this work-from-home era could result in bank failures as hundreds of billions of dollars in commercial real estate loans are due and interest rates are climbing.
"Companies are simply realizing they don't need that much space," Dr. Rebel Cole, professor of finance at FAU's College of Business, told WPTV.
On Friday, Cole shared data from a new study he conducted with WPTV, showing signs of a potentially tumultuous future for the United States banking system.
"Office vacancy rates in big cities, like San Francisco, are currently as high as 30%. For comparison, in 2019 before COVID, they were 3%," Cole said.
Cole's new study found that 1,522 out of 4,641 banks in the U.S. have total commercial real estate exposures greater than 300%, 732 have exposures greater than 400%, 320 have exposures greater than 500% and 113 have exposures greater than 600%.
This is according to Cole's analysis of the most recently available bank regulatory data for Q4 2023.
"Regulators measure this as the amount of loans for commercial buildings to the amount of the bank's equity capital, which is a cushion against losses. And when that gets above 300%, so does the exposure. If three times their equity, the regulators get really scared," Cole said. "I see some serious problems. We talked about office but we didn't talk about other types of real estate. Apartments, retail got hit really hard during COVID. A lot of malls closed, even industrial."
Cole said rising interest rates are also contributing to the problem, with many commercial building owners having to refinance their five-year mortgages at double the percentage they started, ultimately deciding it's not worth it.
"The takeaways on where we are with the banking system is that there's risk," Dr. Ken Johnson, a real estate expert at FAU's College of Business, said.
However, Johnson said the good news for Florida is sun belt states are less prone to bank failures because demand for office space hasn't slowed down, as workers and businesses are still migrating to these areas.
However, he said there still will be indirect impacts.
"It could affect us indirectly because the banking system threatens the whole U.S. economy," Johnson said. "If things do go south enough, that could really cause a national problem that affects us indirectly."