The commercial real estate industry is at risk of its biggest crash since the Global Financial Crisis and may cost U.S. banks as much as $160B, academic researchers said in a new paper published by the National Bureau of Economic Research.

Academics at the University of Southern California and Columbia, Stanford and Northwestern universities produced the paper, titled "Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility."

The paper estimates that roughly 14% of all CRE loans and 44% of loans associated with office assets have fallen into negative equity, with underlying property values less than the outstanding loan balances. Valuations have taken a hit from high interest rates and, in the case of office, the persistence of hybrid work schedules.

A range of 10% to 20% of CRE loans could default, according to the researchers. That stands to stick banks with as much as $160B in losses in the case of a 20% rate of default and $80B for the 10% rate.

With a 20% default rate, losses tied to CRE loans could result in as many as 67 smaller banks becoming insolvent. Such banks tend to have more CRE loans relative to their size than larger banks.

For banks with assets of less than $1.3B, the Community Reinvestment Act asset size threshold for smaller banks, CRE loans account for nearly 25% of assets. For banks with between $1.3B and $250B in assets, CRE loans represent over 30%. For banks larger than $250B, categorized as systemically important institutions, CRE makes up only 4.7% of total assets. The average for all banks is 25.7%, according to the paper.

“This evidence suggests that if interest rates remain elevated and property values do not recover, default rates could potentially reach levels comparing or even surpassing those seen during the Great Recession,” the paper says.

An even worse scenario would involve a run on banks by depositors with more funds than are insured by the Federal Deposit Insurance Corp., as happened in the case of Silicon Valley Bank earlier this year.

“If all uninsured depositors were to withdraw their funds, an additional 200 to 385 banks would fail due to CRE distress, with aggregate assets of about $250B to $500B,” the paper says.

“This is in addition to the 1,799 banks with aggregate assets of $6.3T that we find would already face insolvency in such scenario solely due to higher interest rates.”