Ongoing weakness in the office sector will cost US banks as much as $250 billion.
"It's obvious that office is having enormous difficulties," hedge funder Kyle Bass said.
The bearish call comes as work-from-home and hybrid work trends linger.
The commercial real estate market is poised to weigh down US banks that have considerable exposure to the space, according to Hayman Capital Management founder and CIO Kyle Bass.
He identified the main stress to be office space, which continues to see depressed occupancy rates amid ongoing work-from-home and hybrid work trends.
In an interview with Bloomberg TV, Bass estimated that US banks could lose up to $250 billion on their exposure to commercial offices, which would represent about 10% of their combined $2 trillion in equity.
"It's obvious that office is having enormous difficulties," Bass said on Monday.
Also weighing on the commercial real estate market is higher interest rates, which should put pressure on landlords that have to refinance their loans in the near term.
Most owners of commercial real estate have been able to take advantage of the near-zero rates over the past decade. But the combination of higher rates and falling property values in the commercial real estate sector could be the one-two punch that leads to losses for banks, as some loans near their maturity.
But other areas of the commercial market should remain solid, like industrial real estate, multifamily housing, and data center spaces, according to Bass.
"When you're looking at industrial, it's still performing incredibly well despite the rate hikes. If you look at data centers, you can't build enough data centers today. I think the AI revolution is causing a giant push for new data centers. When you look at multifamily, multifamily is doing really well," he said.
Bass has previously advocated for demolishing underperforming office buildings, as he doesn't see hybrid work trends ending anytime soon while it's also very difficult to transform office buildings into apartments.
"It's one asset class that just has to get redone, and redone meaning demolished," he said in April.
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