These Six Charts Explain How the CRE Debt Crisis Spread to Banks

(Bloomberg) — Property mogul Barry Sternlicht last week said there’s $1.2 trillion of real estate losses in offices alone and “nobody knows exactly where it all is.” Investors are growing alarmed that smaller banks might be on the hook for much of the wipeout.

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Concerns mounted over the past two weeks after New York Community Bancorp, under pressure from a US watchdog, slashed its dividend to help stockpile funds in case commercial real estate loans go bad. And property values may have room to fall further, only adding to the pain for lenders: research firm Green Street estimated this week that appraised values of properties may need to drop another 10% to reach fair valuations.

The turmoil is a blow for landlords and bankers who were waiting for lower borrowing costs to ease the pain, embracing the mantra of ‘Survive Til ‘25.’ While that looked a good bet a couple of months ago, the robustness of the economy may cause the Federal Reserve to cut rates at a slower pace than markets had expected, increasing the risk of write downs at smaller lenders after they pushed into commercial real estate lending in recent years.

Here are six charts that show where we stand and how we got here:

Equity investors have been selling off regional bank shares since the NYCB surprise, but credit investors seem more sanguine, suggesting they see the issues as an earnings issue rather than a financial stability risk. In fact, risk premiums on bank bonds are narrowing more than the broader market, signaling banks bonds are performing better.

That said, CRE credit makes up more than 40% of some lenders’ loan books and the Fed is working with community and regional banks with concentrated exposures to commercial property. That includes coming up with a plan to work through expected losses, chairman Jerome Powell said in an interview with CBS’s 60 Minutes that aired Sunday evening.

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One reason for that is higher capital charges made CRE…