Indeed, Federal Reserve Chair Jerome Powell has cause for concern that the ailing commercial real estate market is just beginning to have an impact on banks. 

“It feels like a problem we’ll be working on for years,” he told CBS in a 60 Minutes interview on Sunday, adding that “it’s a sizable problem,” albeit a “manageable one” that is more likely to affect smaller or regional banks.

That’s the second instance in the past year, though, that Powell has warned of the commercial real estate sector’s effect on smaller, regional banks. In June 2023, a few months after Powell took extraordinary measures to prevent banking contagion after the collapse of Silicon Valley Bank, then the second-largest in U.S. history, he said he was keeping an eye on commercial real estate and its effects on the banking system.

“To the extent that it’s well distributed, then the system could take losses. We do expect that there will be losses, but there will be banks that have concentrations, and those banks will experience larger losses,” Powell told reporters. “So we’re well aware of that, we’re monitoring it carefully.”

The problem with office spaces

In the aftermath of the pandemic, many companies adopted a completely remote or hybrid work model, which has led companies large and small to shed a great deal of their office footprint. Take Fannie Mae and Wells Fargo, which both recently let go of hundreds of thousands of square feet of office space in Washington, D.C., and Raleigh, N.C., respectively. 

That’s just one example of a reeling commercial real estate sector, where there could be 1 billion square feet of unused office space by the start of the new decade, according to Cushman & Wakefield data. And it’s likely to worsen as loans mature and more leases come to the end of their term.

“The current vulnerability of CRE property performance is highly concentrated among office properties, particularly for those with near-term loan maturities and high lease rollover,” Kevin Fagan, Moody’s Analytics head of CRE economic analysis, told Fortune. “With roughly $325 billion of loan maturities coming, some loans will have issues refinancing into a higher interest rate environment and in some cases slowing CRE space demand.”

Many commercial real estate developers and investors took out large loans after the Global Financial Crisis in 2009 when rates were low, but with 10-to-20-year maturities, they’re coming due within the next year or so, explains Michael Imerman, an assistant professor at UC-Irvine’s Paul Merage School of Business who focuses on banking and risk management.

“Although some of these loans are from the big banks [such as] JPMorgan, Bank of America, Wells Fargo, [and] Citi, a lot of this is the primary business for regional banks,” Imerman told Fortune. This is “why I am still very concerned about a crisis in the regional banking space.”

Does CRE’s downfall spell doom for all banks?

This is where economists, banking executives, and real estate experts disagree. Seamus Nally, CEO of property-management software company TurboTenant, says the commercial real estate market has a “massive impact on banks,” particularly regional banks. That’s because homeowners or local businesses tend to seek lending more often from smaller banks than financial institutions, “therefore causing the ebbs and flows of the real estate market to have a much more significant impact on those smaller banks.” 

He anticipates a “few” regional banks will start closing this year, but not a ton.

“The real estate market has been extremely strained for several years now, and it’s only projected to ease up ever so slightly this year,” Nally said. “I could see larger banks start acquiring some smaller ones that cannot handle the market.”

But Grant Cardone, founder and CEO of real estate investment firm Cardone Capital, says the Fed is “covering up” just how much trouble exists in and around regional and commercial banks, and says the problem will extend to “hundreds of banks nationwide, further reducing the number of choices Americans have for their local banks.”

“Banks are being disrupted at the fastest rate in the history of this country,” Cardone told Fortune. “This will further negatively impact commercial real estate values where regional banks and national chains like Wells Fargo, Bank of America, and Citi that have tens of thousands of locations around the U.S. become obsolete, as Americans trust banking online.”

Will there be as many bank failures as 2008 during the Global Financial Crisis?

While Cardone is more pessimistic about the outlook for bank closures and the commercial real estate downfall, Powell doesn’t have as grim of a forecast. 

“It doesn’t appear to have the makings of the kind of crisis things that we’ve seen sometimes in the past, for example, with the Global Financial Crisis,” he said in the 60 Minutes interview. “There will certainly be some banks that have to be closed or merged out of existence because of this,” but he suspects smaller banks will be the ones to incur losses.

“It’s a secular change in the use of downtown real estate,” Powell said. “And the result will be losses for the owners and for the lenders, but it should be manageable.”

Tom Collins, a national commercial banking practice lead with consulting firm West Monroe Partners, agrees that some commercial properties will go into default, but it wouldn’t be the hundreds that Cardone is anticipating—and he doesn’t anticipate we’ll see a 2008-like event “unless something major changes.”

“Regional banks are definitely ground zero for issues related to the commercial real estate market, but big banks could be impacted as well,” Collins told Fortune. “While there are some alarm bells going off for regional banks with regard to the commercial real estate sector, I don’t think it’s time to panic.”