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Another bank executive has chimed in with concerns about the risk that commercial real estate poses for some financial institutions.
JPMorgan Chase CEO Jamie Dimon said on Monday during an investor conference that lenders who gave out loans to fund construction of offices and other commercial properties could be in for a rough ride. But most banks are unlikely to feel the squeeze, he added.
Banks are already responding by scaling back the loans they’re giving out, Dimon said. This is already making credit harder to come by.
“There will be a credit cycle. My view is it will be very normal,” except for banks with high exposure to struggling commercial properties, Dimon said, according to comments published by CNBC.
A rise in unemployment could drive bank losses on credit cards higher, Dimon said. But he expects those losses to fall well short of where they were during the 2008 financial crisis.
For months now, some economists and analysts have pointed to commercial real estate as a potential problem for banks, as the pandemic spurred more workers to take advantage of fully or partly remote jobs. One result of this? Less demand for office space.
And for lenders who provided the funds to build some of these offices and other commercial properties, any distress from commercial properties might jeopardize their hopes of getting their money back.
This dynamic could create an uncomfortable environment for some banks — but not every bank, Dimon said. Smaller lenders are expected to be more exposed to the risk from commercial real estate.
“There’s always an off-sides,” Dimon said. “The off-sides in this case will probably be real estate. It’ll be certain locations, certain office properties, certain construction loans. It could be very isolated. It won’t be every bank.”
This assessment comes as investors continue to watch banks more closely during a period of heightened uncertainty. The Federal Reserve’s efforts to raise interest rates while combating inflation have led some banks to misjudge their interest-rate risk, contributing to several high-profile bank failures in recent months.
“You’re already seeing credit tighten up because the easiest way for a bank to retain capital is not to make the next loan,” Dimon said.