For several years now, commercial real estate has been a growing asset class. With the health crisis and the risk of asset value deterioration, it now represents a threat to banks' balance sheets.
Falling rental demand
In its December 2020 report assessing risks in the financial sector, the Banque de France warns banks of the risk now posed by commercial real estate.
Yet, as the report details, "the exposures of the five main French banking groups to real estate professionals [...] rose sharply to 222 billion euros at the end of 2019", with an increase of 2.8% over the first half of 2020 and 8.8% over the year as a whole.
While commercial real estate financing has been attractive until now, particularly in an environment of low interest rates, the health crisis could well change all that. Office property, the most at-risk sector, accounts for two-thirds of commercial real estate loans.
With the development of telecommuting and e-commerce, coupled with the shutdown of entire sectors of the economy, rental demand has fallen. This phenomenon is likely to lead mechanically to an increase in rental vacancies, and therefore to a fall in rents, which would result in "a reduction in the price of the properties concerned".
A risk of weakening bank balance sheets
The Banque de France report nevertheless stresses that the commercial real estate market "is not large enough - taken in isolation - to put financial institutions in difficulty on its own", but explains that the risk should not be minimized: "it could nonetheless contribute, among other factors, to weakening their balance sheets and limiting their capacity to finance the economy", says the institution.
So far, real estate professionals are showing resilience, "as the rate of gross doubtful exposures continues to fall at June 30, 2020, reaching its lowest since June 2015 at 2.6%." However, this resilience is partly due to the "broad public support that is delaying any potential default".
The real impact on commercial real estate can only be measured when the public economic support measures come to an end, and the full effects of the crisis are felt.