The Reality of Commercial Real Estate Financing

Commercial real estate encompasses not only retail spaces but also apartment buildings, which are often financed partly by short-term financial products from local banks. In a low-interest or stable environment, there is an incentive to delay acknowledging the reality of vacant units being rented out at high rates. However, when interest rates increase, the value of these financial products decreases, leading banks to face the consequences of prolonging the 'extend and pretend' strategy. The potential shakeout in the regional commercial banks due to unrealized rental expectations in the apartment market may drastically change the landscape in the near future.