Commercial Real Estate Distress and Residential Mortgage Pricing: Evidence from U.S. Banks

Abstract

The pandemic-driven rise in work-from-home (WFH) has increased stress in commercial real estate (CRE) markets, potentially affecting banks’ lending beyond CRE. I measure banks’ exposure to the WFH shock using pre-pandemic county-industry employment, industry teleworkability from Dingel and Neiman (2020), and banks’ 2019 branch deposit distributions. Among banks with less than $100 billion in 2019Q4 assets, more-exposed banks exhibit deterioration in CRE loan performance after 2022. Their balance sheets also shift, with an initial decline followed by an increase in the CRE loan share, a decline in the residential loan share, and an increase in the securities share. A one-standard-deviation increase in WFH exposure is associated with a 4.16-basis-point increase in residential mortgage rate spreads during 2022–2025. This pricing response is smaller in counties that account for a larger share of a bank’s deposits, in more concentrated mortgage markets, and among lenders with stronger local market positions. he response is larger in counties whose WFH exposure exceeds their lender’s exposure. These findings provide evidence that post-pandemic CRE stress spills over to residential mortgage lending.