Commercial real estate trouble could trigger systemic credit crash, fund managers say

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Fund managers are growing more worried that trouble in the commercial real estate sector could trigger a credit crisis in the U.S., according to a new Bank of America survey.

About 16% of participants in the global fund manager survey identified a «systemic credit event» as the top risk to markets in February, compared with just 11% the prior month. It marked the third-largest tail risk for markets, behind sticky inflation and geopolitics. 

The most likely source of a credit event, according to the fund managers, is the commercial real estate market. 

Other possible sources include shadow banking, or non-bank financial institutions that are not subject to regulation, including hedge funds, private equity funds, investment banks and mortgage lenders, as well as U.S. corporate debt.

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A «Wall Street» sign in New York City on Jan. 27, 2023. (Photographer: John Taggart/Bloomberg via Getty Images / Getty Images)

About $1.5 trillion in commercial mortgage debt is due by the end of 2025, but steeper borrowing costs, coupled with tighter credit conditions and a decline in property values brought on by remote work, have increased the risk of default. 

Roughly $929 billion worth of commercial real estate loans are set to mature this year, according to the Mortgage Bankers Association. Borrowers may have no choice but to refinance with significantly higher interest rates or sell their properties at a steep loss. 

The Federal Reserve raised interest rates to the highest level since 2001 in response to sky-high inflation. Rates are poised to