In the US, as the fear of losses from commercial real estate looms large, regulators are carefully monitoring what the sector’s main lenders, the banks, are doing to mitigate this risk. Last week, the Federal Reserve’s chief bank watchdog Michael Barr told an audience at New York’s Columbia University that supervisors were closely focused on whether they are “provisioning appropriately and have sufficient capital to buffer against potential future CRE loan losses.”

The Fed’s warning, while helping to insulate banks from losses on future real estate lending activities, will do little to drag the asset class out of its current predicament, however.

Indeed, many of the country’s largest banks have not been so conservative. According to a report this week by the Financial Times, citing filings to the Federal Deposit Insurance Corporation, average reserves at JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley have declined from $1.60 to 90 cents for every dollar of commercial real estate debt where a borrower is at least 30 days late.

Time is running out to fix the problem, too. In its global analysis of real estate’s debt funding gap last month, AEW estimated a refinancing shortfall for US loans originated between 2018 and 2021 of around $120 billion over the next three years, and $100 billion in Europe. Despite the US serving as the epicenter of commercial real estate’s financing woes thus far, the manager calculated Europe is in even more trouble on a relative basis: 16 percent of all loans in the region will be subject to a debt funding gap, compared with 14 percent in the US.

With lenders curtailing their leverage offerings to manage their own books and loan loss provisions, managers are under even greater pressure to make up any shortfall when their existing loans mature. But do they have the cash reserves to do so? David Hodes, a founder and co-managing partner of New York-based capital advisory firm Hodes Weill & Associates, told PERE most do not.

“Most assets probably would need another 15 to 20 percent to address refinancing if they had to do it today based on current lender appetite for risk,” he said, explaining managers typically hold around 10 percent of a fund’s capital in reserves. The higher costs required to stabilize an asset in today’s market are another reason why this level is no longer sufficient to safeguard investments, he added.

The buck, in such instances, would then pass to their investors. Hodes said conversations to this effect are still “at a very early inning.” But whether institutions will be incentivized to funnel more capital into an asset class where an extra 20 cents now ought to be put aside for every dollar invested – and where the banks are increasingly reticent to lend – is a matter for debate.

Recent investor sentiment surveys, including PERE’s own, would suggest a healthy proportion of institutions have conviction in real estate’s long-term prospects. But after being hung out to dry by an unprecedented interest rate spike in a considerably short period of time, not to mention era-defining structural headwinds, real estate’s risk profile may have already changed beyond recognition.

Undoubtedly, private real estate’s current risk levels will dissipate. When they do, and the cycle moves on after the wall of debt maturities is settled, the horse will have already bolted as far as reserve requirements are concerned.