In a recent revelation, property tycoon Barry Sternlicht warned of $1.2 trillion in real estate losses, primarily in offices, with the uncertainty of its exact location causing investor anxiety. Smaller banks face heightened concern following New York Community Bancorp’s dividend cut, anticipating potential fallout from commercial real estate loan defaults. Amid economic uncertainties, the Federal Reserve’s cautious rate-cut approach poses risks for lenders, prompting worries of increased write-downs. Charts highlight the market dynamics, revealing both challenges and opportunities in the commercial real estate landscape.
Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.
By Neil Callanan
Property mogul Barry Sternlicht last week said there’s $1.2 trillion of real estate losses in offices alone and “nobody knows exactly where it all is.” Investors are growing alarmed that smaller banks might be on the hook for much of the wipeout. ___STEADY_PAYWALL___
Concerns mounted over the past two weeks after New York Community Bancorp, under pressure from a US watchdog, slashed its dividend to help stockpile funds in case commercial real estate loans go bad. And property values may have room to fall further, only adding to the pain for lenders: research firm Green Street estimated this week that appraised values of properties may need to drop another 10% to reach fair valuations.
The turmoil is a blow for landlords and bankers who were waiting for lower borrowing costs to ease the pain, embracing the mantra of ‘Survive Til ‘25.’ While that looked a good bet a couple of months ago, the robustness of the economy may cause the Federal Reserve to cut rates at a slower pace than markets had expected, increasing the risk of write downs at smaller lenders after they pushed into commercial real estate lending in recent years.
Here are six charts that show where we stand and how we got here:
Equity investors have been selling off regional bank shares since the NYCB surprise, but credit investors seem more sanguine, suggesting they see the issues as an earnings issue rather than a financial stability risk. In fact, risk premiums on bank bonds are narrowing more than the broader market, signaling banks bonds are performing better.
That said, CRE credit makes up more than 40% of some lenders’ loan books and the Fed is working with community and regional banks with concentrated exposures to commercial property. That includes coming up with a plan to work through expected losses, chairman Jerome Powell said in an interview with CBS’s 60 Minutes that aired Sunday evening.
One reason for that is higher capital charges made CRE loans less attractive to the largest banks after the financial crisis. Smaller lenders that faced fewer capital requirements saw a chance to boost market share and piled in, increasing their exposure just as interest rates began to rise.
The upshot now is that banks are by far the largest source of finance to the industry. With many of them hamstrung by losses, it will be harder for borrowers to refinance, increasing the risk of losses.
An additional complicating factor for lenders in the US is the amount of CRE lending that was interest-only, at least for mortgages bundled into bonds. While loan-to-value ratios may have been conservative, the decline in property values there has been so large it’s left bondholders vulnerable to losses in their commercial mortgage backed securities portfolios.
The troubles with CRE are by no means limited to the US. Real estate is the industry accounting for the largest amount by far of distressed bonds and loans globally, much of it from China which has been in a property downturn for more than three years. Distress has also spread to Germany and the Nordic nations, after a splurge using cheap borrowing turned bad as borrowing costs rose.
More than $220 billion of bonds and loans linked to property are currently distressed globally, according to data compiled by Bloomberg News. That’s a fall of just $11.4 billion since Powell said in mid-December that the interest-rate hiking cycle was essentially over and that discussion of possible cuts was coming “into view,” sparking a rally in a wide array of securities markets.
- What drives investors to US Healthcare real estate
- 🔒 From the archives: Charlie Munger’s final interview with the FT – warned that real estate is not a safe bet anymore
- 🔒 Tyler Cowen: AI boom reshapes real estate winners and losers
© 2024 Bloomberg L.P.