Don’t return to work, trouble in your local bank
What is happening?
Remote-work numbers have dwindled over the past few years as employers issue return-to-office mandates. But will that continue in 2024? The numbers started to slide after spring 2020, when more than 60% of days were worked from home, according to data from WFH Research, a scholarly data collection project. By 2023, that number had dropped to about 25% ‒ significantly lower than its peak, but still a fivefold increase from 5% in 2019. But work-from-home numbers have held steady throughout most of 2023. According to remote-work experts, they're expected to rebound in the years to come as companies adjust to work-from-home trends. “Return-to-office died in ‘23,” said Nick Bloom, an economics professor at Stanford University and work-from-home expert. “There’s a tombstone with 'RTO' on it.” As RTO demands continue their decline, the blue print for office needs will decrease.
Why it matters?
The relationship between community banks and vacant office buildings is a multifaceted interplay that significantly influences local economies, the commercial real estate sector, and the financial stability of communities. Community banks, which are typically smaller financial institutions serving local markets, play a crucial role in shaping the economic landscape of the areas they operate in. Meanwhile, vacant office buildings can be both a symptom and a cause of economic shifts, reflecting changes in business dynamics, workforce trends, and broader market conditions.
Community banks are often deeply intertwined with the economic fabric of their regions. Their lending practices, financial services, and community engagement contribute directly to the vitality of local businesses and residents. When community banks thrive, they fuel economic growth by providing capital to small businesses, supporting homeownership, and fostering financial stability within the community. Conversely, challenges or closures of community banks can have ripple effects, impacting access to credit, local investment, and financial services.
Commercial real estate lending remains a core activity at U.S. banks, and is especially important to community banks. Banks hold about 60% of loans associated with nonfarm, nonresidential properties. These properties include office buildings, hotels, retail stores and warehouses. Two-thirds of these loans are held by community or regional banks. According to S&P Global, nine of the 17 banks that reported office loans on their books of at least $400 million pulled back on these loans in the fourth quarter of 2022, citing weakening demand and challenging economic conditions. For loans still on their books, a major concern is the ability of borrowers to refinance their loans at term end following substantial increases in interest rates over the past 18 months.
Many of the loans that originated over the past few years have been interest only, which will magnify the cash flow issues of landlords when amortization begins. Community Banks Have Greater Exposure to CRE Loans. For U.S. banks as a whole, CRE loans make up about a quarter of total loans outstanding. But for the universe of community banks—banks with assets of less than $10 billion—they account for nearly half of all loans. In the Eighth District, CRE loans make up just under half of all loans, regardless of bank size.
Given the economic factors discussed earlier, it is likely the commercial real estate market continues to experience stress in the near term. While there are direct linkages to the commercial banking system—especially for community banks, many of whom have balance sheets with substantial CRE exposures—it is also important to note that the capital positions of most U.S. banks are much stronger than in past episodes where we’ve seen similar stresses. Community bank supervisors will be particularly focused on CRE concentration risk, among other key risks, as we continue to see the impact of rising rates and a slowdown in domestic and global growth on our banking system.