Work-From-Home, Commercial Real Estate Risk and Credit Supply: Evidence from a Large Sample of Bank Loan Portfolios

Abstract

The rise in work-from-home (WFH) rates initiated by the pandemic has contributed to reduced commercial real estate (CRE) valuations and cash flows. This valuation decline increases credit risk in banks' CRE portfolios, which could impact the real economy if banks reduce lending (to CRE or other borrowers). Using a new data source, we calculate the exposure of thousands of individual banks to the WFH shock based on the geographic distribution of their outstanding pre-pandemic CRE loan portfolio. We find that banks with a one standard deviation increase in exposure decrease new CRE originations by 7.3 percent due to tighter credit supply. We document negative spillover effects across lending categories: banks with higher WFH exposure in their CRE portfolios also reduce credit supply for risky non-CRE loan types. Finally, we estimate that the average zipcode experienced a 25 pp decrease in the growth rate of total new originations due to the bank lending response to the WFH shock. These results suggest some but incomplete substitution of credit demand from exposed banks to nonbanks. * The analysis and conclusions contained in this presentation are those of the authors and do not necessarily reflect the views of the Board of Governors of the Federal Reserve System, its members, or its staff.