How much pain could commercial real estate heap on U.S. banks and the economy? A lot.

Commercial real estate is in trouble. There are several reasons why.

First, higher interest rates put pressure on commercial real estate operators who financed their acquisitions with debt at historically high property values and low interest rates. Many of these loans mature in the next couple of years and may have to be refinanced at much higher rates potentially resulting in maturity default.

Second, recent technology-sector layoffs and a potential U.S. recession could lead to a significant decline in the demand for commercial properties, adversely affecting their valuation.

Finally, the shift in workplace culture to more hybrid and remote styles is putting significant pressure on office properties, which constitute a sizeable share of all commercial real estate. As of July 2023, just half of U.S. workers had returned to the office on an average day relative to pre-pandemic levels.