A National Bureau of Economic Research paper warned commercial real estate loan defaults could reach Great Depression-era levels if rates stay high. USC Finance Professor Erica Jiang discussed the risks on Yahoo Finance Live.

Jiang noted falling property cash flows, declining values, and refinancing challenges raising distress, especially for offices, multifamily, and hotels. She says "rising interest rates make it very difficult" to refinance, causing rollover issues.

With 15% of commercial loans already underwater presently, Jiang notes default outlooks now "don't look very good." She highlighted offices as particularly exposed, with 45% of office loans underwater, meaning the property value is below the loan amount. This makes refinancing unlikely as it "has high default risks."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

- A new paper out from the National Bureau of Economic Research. It's coming out this month about the risks of commercial real estate loans on bank balance sheets. The report indicating that if interest rates do remain elevated and property values do not recover, default rates could reach levels comparable or even surpassing those seen during the Great Recession.

For more on the commercial real estate cliff, we're talking to one of the authors of that paper, Erica Jiang, who is USC Marshall School of Business assistant professor of Finance and Business Economics. Erica, thank you so much for joining us.

This paper caught my eye. This has been a big topic of discussion whether CRE on bank balance sheets was going to be a problem. What are the key things that you are watching? What is the situation as it stands here in terms of the status of commercial real estate?

ERICA JIANG: Great. Thank you so much for having me. There are several reasons why CRE has been viewed as having an elevated distress risk. On the one hand, the commercial real estate faces increased business risk that decreases the fundamental values of properties.

For example, the office properties are under significant pressure due to remote and hybrid work patterns. And the lower demand for offices can also negatively impact the demand for other commercial real estate properties like urban, retail, multifamily, and also hotels. And on the other hand, rising interest rates make it very difficult to refinance their loans, which increases the financial risk of CRE.

And most of the commercial real estate loans are going to mature in the next few years. And declining property valuation and rising interest rates make it very difficult to roll over the debt, which could lead to maturity default, which is the focus of the first part of the paper you saw.