0 50 100 150 200 250 300 350 400%0
5
10
15
20
25
30
35
40%
CRE LOANS AS A
% OF ALL LOANSCRE LOAN ASSETS AS A % OF EQUITY CAPITAL AND RESERVESZIONS BANCORPORATIONCULLEN/FROST BANKERS M&T BANKJPMORGAN CHASECITIGROUPBANK OF AMERICAWELLS FARGOKEYBANKFIFTH THIRD BANCORP
U.S. BANCORP
PNC FINANCIAL SERVICES
TRUIST FINANCIALZIONS BANCORPORATIONCULLEN/FROST BANKERS M&T BANKJPMORGAN CHASECITIGROUPBANK OF AMERICAWELLS FARGOKEYBANKFIFTH THIRD BANCORP
U.S. BANCORP
PNC FINANCIAL SERVICES
TRUIST FINANCIALBANKS’ EXPOSURE TO COMMERCIAL REAL ESTATE (CRE) LOANSKEY: 10,000150,000
LOANS100,00050,00024 FORTUNE FEBRUARY/MARCH 2021
REAL ESTATEFirst Bars, Then Banks?
COVID has clobbered small businesses—
and the ripple effects could create big
headaches for lenders. BY LANCE LAMBERT
FLOOR-TO-CEILING, the interior
of Tattooed Mom is covered
in graffiti. The bar, which has been
open for 23 years on South Street in
Philadelphia, doesn’t stop its hipster
patrons from getting crafty. But even
with its faithful clientele transition-
ing to takeout, Tattooed Mom has
problems that can’t be painted over.
It’s unprofitable, and sales remain
down 70% from pre-pandemic levels.
Robert Perry says his bar will survive,
but many of its neighbors won’t.
“Within a one-block radius there are
six restaurants that are already gone,”
he says. “Every week you read about
new closures, and it breaks my heart.”Some buttoned-down
bankers could soon share
his pain. As the pandemic
wears down bars, gyms,
hotels, and other busi-
nesses, it runs the risk of
causing a commercial real
estate (CRE) tenant crisis,
which could put billions of
dollars’ worth of loans in
jeopardy. Neel Kashkari,
president of the Federal
Reserve Bank of Minne-
apolis, tells Fortune that
CRE is the most vulner-
able financial sector—with
the potential to cause
a shock to the system.
“Thousands of small busi-
nesses have already or will
go under ... That rolls up
into the commercial real
estate market and rolls up
into the banking sector,”
Kashkari says.
Small to midsize banks
face the greatest risk. AtBank of America and
JPMorgan Chase, CRE
makes up only 6% and 15%
of all loans, respectively,
according to Morningstar.
But that figure is 38% at
Buffalo-based M&T Bank
and 37% at Texas’s Cullen/
Frost Bankers—which
in January conducted its
first layoffs in nearly two
decades. Banks like these
are bracing for defaults: In
2020, M&T increased its
provision for credit losses
to $800 million, up 355%
from the prior year.
Any crisis could take
years to brew. Outside of
hotels, distressed sales of
commercial property aren’t
abnormally high to date.
But Greg Gleason, presi-
dent of real estate private
equity firm Corigin, says
more such sales loom, as
banks and owners unload
vacant assets. Through
2022, analytics firm CoStar
forecasts $126 billion in
distressed CRE sales, with
the total rising to over
$320 billion by 2025. The
outlook could be grimmer
if work-from-home trends
outlast the pandemic,
creating trouble for of-
fice buildings. As of now,
75% of companies plan
to use less office space in
the future, according to a
Fortune survey of CEOs in
December in collaboration
with Deloitte.
Still, Kashkari says the
CRE risks should be man-
ageable if banks are vigi-
lant about their portfolios.
Keep an eye on the vaccine
rollout, he advises: The
longer it takes to tame the
virus, the more businesses
will close —and the shakier
some banks will look.THE BRIEFCHART SOURCE: MORNINGSTAR