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Commercial Real Estate Exposure and Bank Stock Returns
FRB of St. Louis
2024.04.11
The COVID-19 pandemic induced social and economic changes, such as accelerating the shift to work from home and e-commerce, that have downgraded the future prospects for office buildings and shopping centers. As a result, debt backed by commercial real estate (CRE) has become a financial stability concern.1 In a previous Economic Synopses essay, we showed that at least 40% of debt backed by CRE is held by banks. Additionally, in a later essay, we performed a simple stress test, in which we considered different scenarios for changes in the valuation of U.S. banks’ CRE exposures and found that most banks appeared to be sufficiently capitalized to withstand significant drops in CRE valuations.
In this blog post, we study how differences in exposures to CRE have affected the stock market value of different bank holding companies (BHC) after the start of the pandemic. Given the negative outlook on certain segments of CRE, one would expect that more-exposed banks have experienced worse market performances. We found that while CRE exposure has not mattered much for bank stock returns since the 2007-09 financial crisis, the correlation became significantly negative in 2023.