Charlie Munger warns of stress in the US commercial property market with banks carrying a lot of bad loans as prices slump

• Warren Buffett's right-hand man Charlie Munger warned of trouble in the commercial property market.
• The Berkshire Hathaway investing legend said US banks are full of bad loans from that sector.

Investing legend Charlie Munger flagged trouble in the US commercial property market, telling the Financial Times that banks are exposed to a lot of distressed loans.

Munger's warning comes as the financial services industry contends with pressure in that property market following bank failures this year, including Sunday's regulatory seizure of First Republic Bank that marks the second-largest bank failure in US history.

US banks are "full of" what the Berkshire Hathaway vice-chair characterized as "bad loans" as property prices fall, according to the 99-year-old billionaire investor.

"It's not nearly as bad as it was in 2008," Munger told the FT. "But trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits . . . When bad times come they lose too much."

The right-hand man of Warren Buffett spoke as lenders, including major banks, have been expanding their provisions to shield against loan losses, reflecting concerns about the health of commercial real-estate debt.

An analysis by debt-tracking firm Trepp of found the four largest US banks – Wells Fargo, JPMorgan Chase, Bank of America, and Citibank – collectively have $62.9 billion of such loss provisions.

Meanwhile, experts have warned the banking crisis that erupted in March after the failures of Silicon Valley Bank and Signature Bank will further strain the commercial property market, which continues to see high vacancy rates amid the work-from-home trend.

"A lot of real estate isn't so good anymore," Munger said. "We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There's a lot of agony out there."

Berkshire has supported US banks through periods of financial instability, the FT noted, such as its $5 billion investment in Goldman Sachs during the financial crisis in 2007-2008 and a similar amount in Bank of America in 2011.

But Berkshire has been on the sidelines during this year's bank collapses.

In the latest instance, JPMorgan will take over First Republic, which saw deposits drop by $100 billion after SVB crashed.

First Republic, which catered to wealthy clients, was unable last week to piece together a private-sector rescue that would have avoided seizure by the FDIC.