The Pretending Is Over

For years, big banks looked at their underwater commercial real estate loans and decided to stare at the wall instead of the problem. Low interest rates, murky valuations, and limited comparable sales gave them cover to kick the can.

That era is done.

According to the Los Angeles Times, lenders including Goldman Sachs and Deutsche Bank are now selling off distressed commercial property debt — sometimes at discounts of 85 cents on the dollar. Not 15% off. Eighty-five percent losses.

The Numbers Are Staggering

The LA Times reports there is more than $130 billion in distressed commercial-property debt that needs to be worked through the system. That's a systemic problem hiding on bank balance sheets.

Here's what that looks like in real transactions:

• Shanghai Commercial Bank sold its loan on a stalled Manhattan condo conversion at an 85% discount to the debt's payoff amount, according to the LA Times.
• Netflix is in talks to buy a historic Los Angeles movie studio for a fraction of its $1.85 billion 2021 sale price — after lenders led by Goldman Sachs took over the property.
• Investors in a $240 million commercial mortgage bond backed by a San Francisco office building took losses after the underlying loan sold for just $101 million — less than half the original value.
• Ready Capital Corp. unloaded a pool of apartment loans in the Sunbelt at roughly a 30% discount, according to the LA Times. The company told investors in February it was seeking buyers for $1.5 billion in loans.

Remote Work Didn't Go Away — It Got Bigger

The pandemic broke the office market and it hasn't healed.

David Marino, cofounder of Hughes Marino, a San Diego-based corporate real estate advisory firm, told EpochTV's Market Insider that about 85% of U.S. companies have had to renegotiate or restructure their office space. His assessment: "The horses are out of the barn and never coming back."

The data supports this. A Bureau of Labor Statistics report from April 16 shows that 22.6% of workers teleworked or worked from home in March. Job platform FlexJobs reported April 1 that remote job postings in Q1 increased 20% month over month, with 65% of those positions targeting experienced workers.

Office Values Are Still in Free Fall

According to Cushman & Wakefield, national office sublease inventory in Q1 declined 13.6% year over year to 101 million square feet — which sounds like progress until you remember that sublease space peaked at 189 million square feet in January 2023, per CBRE Group.

A February report from financial data firm MSCI showed commercial property prices rose 0.3% year over year in January. Downtown office values declined 1.3% and are down 40.2% from three years ago.

Forty percent. Gone.

The Bank Exposure Problem

The mainstream financial press glosses over this: it's not just Goldman and Deutsche Bank holding this debt. Community banks are deeply exposed.

CBRE estimated in a 2023 analysis that total commercial real estate loan losses across all lenders could reach up to $125 billion over several years, with office loans accounting for roughly $53 billion of that. For banks alone, CBRE put the number at $60 billion, including $26 billion in office loan losses.

Banks hold about 45% of all outstanding office debt, per CBRE. Smaller community banks are proportionally more exposed than the big Wall Street names that dominate the headlines.

Analysts often point out that office loans held by banks represent only about 1.5% of total banking system assets — so no systemic collapse. But that's cold comfort if you're a regional bank in a mid-sized city sitting on a portfolio of half-empty downtown office towers.

What the Coverage Gets Wrong

Most financial media is framing this as a cleanup story — "the system is working through distress, long-term opportunities ahead." That's not wrong, but it's incomplete.

The extend-and-pretend game lasted years longer than it should have. Regulators allowed banks to carry these loans at optimistic valuations. That's not prudent oversight — that's deferring risk until someone else deals with it.

Xander Snyder, senior commercial real estate economist at title insurer First American Financial Corp., told the LA Times: "If you're on the wrong side of one of those transactions, it can feel catastrophic if you have to report to investors you've lost their money."

Some pension funds, insurance portfolios, and private investors are about to get letters they won't enjoy reading.

What This Means for Regular People

If you have a 401(k) or pension with exposure to commercial mortgage-backed securities — and many do — some of those holdings took real hits. The San Francisco office bond that returned $101 million on a $240 million investment didn't hurt Wall Street abstractions. It hurt actual investors.

For taxpayers, the risk is that small and mid-sized bank stress translates into tighter lending for small businesses, higher borrowing costs, or — worst case — bank failures that pull in FDIC insurance. The FDIC fund isn't infinite.

The reckoning is finally happening. Markets can't heal until bad debt gets cleared. Someone is paying for every one of those 85-cent-on-the-dollar write-downs.

It's not the bankers who made the bad loans. It rarely is.