Turmoil in the office market is putting a growing number of banks in peril, as loan defaults threaten billions of dollars in losses.

Owners at about 44% of office properties are underwater on their loans, meaning property values are less than outstanding loan balances, according to new data from four economists at the National Bureau of Economic Research.

That suggests more bank failures could be on the horizon, with a 10% default rate on all commercial real estate loans signaling a potential $80B in losses. CRE loans account for about $2.7T in aggregate bank assets, according to the research.

“Our analysis, reflecting market conditions up to [the third quarter of 2023], reveals that CRE distress can induce anywhere from dozens to over 300 mainly smaller regional banks joining the ranks of banks at risk of solvency runs,” the researchers wrote.

“These findings carry significant implications for financial regulation, risk supervision and the transmission of monetary policy.”

The rising cost of debt means about a third of all CRE loans and the majority of office loans will have trouble refinancing when debt matures, especially since interest rates have in many cases doubled since the loans were originated.

If the average CRE loan originated at an interest rate of 3.97% were to refinance today, more than 17% of all CRE loans and 24.3% of office loans would fail to pay down their debt, the researchers found.

The Federal Reserve has hinted at three rate cuts in 2024, which could curtail distress, but whether that actually occurs remains a subject of debate. Until then, researchers said the exposure of banks to CRE distress puts their survival at serious risk.

“Certainly, if the interest rates continue to go down this would — all else being equal — help increase property prices and that will make refinancing much easier,” economist and Columbia University professor Tomasz Piskorski told Commercial Observer. “The Fed lowering interest rates will help in two ways: It helps property values go up and will make refinance loans at maturity much easier.”