While the debates continue throughout industries that made pandemic-induced alterations to their work environments, those who facilitate the finance behind commercial real estate properties are concerned about the creditworthiness of buyers.
As companies like WeWork take steps to renegotiate real estate leases, the domino effect that could result in organizations not re-upping or going delinquent on their commercial real estate commitments has bankers concerned about the next 12 months.
A recent S&P survey of approximately 150 U.S. banking executives asked where declining creditworthiness lies in loan portfolios. The answer was clear: among commercial real estate borrowers. About 42% of all those surveyed said they expect credit quality to deteriorate in their commercial real estate loan portfolio over the next year. That was the highest percentage among any loan type and was up 16% from the first quarter.
Recession Likelihood
Banking leaders think differently than CFOs about the prospects of a recession. Almost 68% of the bankers surveyed expect a recession within the next nine months, including 13% of respondents who think the U.S. is already in recession. In the same survey in the fourth quarter of 2022, about 66% of respondents predicted a recession by the summer of 2023.
On top of the anticipation of a recession among banking leadership, confidence in their ability to sustain growth is also low. Thirty-seven percent of respondents expect their organization’s growth outlook to remain the same over the next year, 35% said there will be a slight decrease, and 25% anticipate a slight increase.
M&A Impact
In a market ripe for action, according to recent data, S&P findings show the market is saturated with buyers. According to the banking survey findings, over a third (37%) of respondents said they were likely to be a buyer in the M&A space over the next 12 months. When asked who the sellers in the same timeframe would be, 94% of all respondents said they would not likely be on the sell side of an M&A deal.
According to S&P, M&A activity has slowed down this year. Only 63 U.S. whole-bank deals were announced year to date through Aug. 22, down from 107 deals in 2022 and 133 deals in 2021 during the same period.