Commercial property and the banks that lent against it
Property does not fail when its value falls. It fails when a loan comes due and cannot be refinanced.
Understand the timetable, because this is a problem that arrives on a schedule.
How Commercial property and the banks that lent against it works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
Why a solvent bank can die in 48 hours
The bank lent your deposit out. That is not a scandal, it is what a bank is. It only becomes fatal when everyone asks for their money on the same afternoon.
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Working from home changed the demand for offices permanently
Not entirely, and not everywhere, but enough. A building leased at half its previous occupancy is worth dramatically less, and the older, less desirable stock may be worth close to nothing as an office.
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But the loss only crystallises at refinancing
Commercial mortgages are typically interest-only for a term, then refinanced. While the owner keeps paying, nothing happens and the loan is carried at par. The reckoning is deferred to the day the loan matures and a new lender values the building at today's price, with today's rates.
That means the problem has a timetable. You can look up the maturity schedule, and it is public.
'Extend and pretend' is the industry term for delaying that day. It works until rates fall or the building recovers. If neither happens, it only postpones.
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The exposure is concentrated in smaller banks
The largest banks are diversified and heavily supervised. Smaller regional lenders often have a far higher share of their loan book in commercial property, which means a local problem can become a solvency problem for the lender rather than a bad quarter.
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So read the loan book, as always
For any bank you own: what share of the loan book is commercial property, what kind, and when does it mature. Every banking crisis in history has been a loan book that everyone agreed was fine until it very suddenly was not.
You can name the share of your bank's loan book in commercial property, and when it matures.
Read next
Property does not fail when its value falls. It fails when a loan comes due and cannot be refinanced.
Price to book and return on equity read together, which is the only way a bank makes sense.