In addition to the looming threat of unrealized losses on bond portfolios, the U.S. banking system is also facing pressure from the rapidly deteriorating commercial real estate (CRE) market. According to the FDIC, the delinquency rate for non-owner-occupied CRE loans is now at its highest level since the fourth quarter of 2013.

The CRE sector is grappling with a triple whammy of falling prices, falling demand, and rising interest rates. The post-pandemic rise of telecommuting and work-at-home programs has crushed demand for office space, leading to soaring vacancy rates in commercial buildings. This has put significant stress on commercial real estate companies, with the biggest bankruptcy in 2023 being the failure of the Pennsylvania Real Estate Investment Trust, which had loaded up with more than $1 billion in liabilities.

The collapse of the commercial real estate market could easily spill over into the financial sector, as around $1.2 trillion of commercial real estate debt in the United States is set to mature over the next two years. Small and midsized regional banks are particularly exposed, holding more than 4.4 times the exposure to CRE loans than major “too big to fail” banks.

According to a report by a Goldman Sachs economist, banks with less than $250 billion in assets hold more than 80 percent of commercial real estate loans. With many of these loans coming due in the near future, the banking system could face a significant shock if the CRE market continues to deteriorate.