Commercial real estate, a red flag for banking sector recovery – JPMorgan CEO

Commercial real estate

Weakness in the Commercial real estate industry poses risks to the recovery of the US banking sector, JPMorgan & Chase CEO Jamie Dimon warned during the bank’s investor conference Monday.

Impacted by the slew of bank failures, the commercial real estate industry has faced several headwinds in recent months, including high-interest rates, tighter credit conditions, and rising office vacancy rates due to work-from-home trends. These factors are fueling worries about potential loan defaults by commercial property loan borrowers.

“There’s always off-sides,” Dimon said. “The off-sides, in this case, will probably be real estate. It’ll be certain locations, certain office properties, certain construction loans. It could be very isolated; it won’t be every bank.”

Dimon added that banks, especially smaller ones, should prepare for the possibility of interest rates climbing up to 6% or 7%.

“I think everyone should be prepared for rates going higher from here,” he said.

Additionally, a Moody’s Analytics report showed that commercial property prices decreased less than 1% in the first quarter –the first time in 12 years.

Small and mid-sized regional banks accounted for more than 60% of all debt in the commercial lending sector, according to the Federal Reserve, making banks highly exposed to loan defaults and investors fret over the financial system’s stability.

“You’re already seeing credit tighten up because the easiest way for a bank to retain capital is not to make the next loan,” Dimon said.

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