Posted on 06/06/2023 5:01:24 AM PDT by Kaiser8408a
Like the song “Walk away Renee,” the owners for the San Francisco Union Square Hilton and Park 55 Hotels are walking away from their sizeable loan payments. San Francisco is definitely feeling the blues.
But it isn’t just San Francisco. Phil Hall reports that Fitch Ratings reduced its 2023 outlook for the U.S. real estate investment trust (REIT) sector outlook from “Neutral” to “Deteriorating,” citing the tumult in the commercial real estate space.
While Fitch noted that most of its rated REITs “have the capacity to withstand such a slowdown within rating sensitivities [and] those with ample dry powder could capitalize on distressed property sales by weaker capitalized players.” But at the same time, the ratings agency warned that banks – which account for nearly half of the $5.5 trillion commercial mortgage market – saw their lending levels drop by 20% between February and April, with more tightening expected.
“At minimum, this will lead to further contractions in CRE credit, further limiting conditions for property transactions,” Fitch added in its announcement of the outlook reduction, adding that “CRE transaction volume has steadily declined since early 2022 due to the confluence of operating fundamentals pressure, higher interest and capitalization rates, limited buyer financing, and looming recession risk. The rapid jump in rates has resulted in unusually wide value discrepancies between buyers and sellers across most property types and markets, particularly in the struggling office sector. Our forward-looking U.S. equity REIT ratings incorporate assumptions about future property disposition volumes and valuations.
The NAREIT All-equity index has gotten pummelled by the S&P 500 index since The Fed started tightening monetary policy to fight inflation …. that The Fed helped cause in the first place.
Under Biden, the US is beginning to morph into a lawless Socialist sewer like Venezuela. Joe Maduro??
(Excerpt) Read more at confoundedinterest.net ...
Unless we get back to lending standards that are based in REALITY, rather than social programs, the best thing to do is stay away from REITs, if at all possible (and often it’s not, sadly, as the ‘professionals’ in the investment business seem to love the damn things).
Any REIT investing in a major american city is due for tremendous losses due to homeless camps, open drug use, masses of illegals running wild, general lawlessness, leftists siphoning off as much ‘tax’ money as possible from any business unfortunate enough to have a presence in the city, etc. America is going out with a wimper and not with a bang. Truly pathetic what the left has done to this country.
Hilton spun out the real estate to Park Hotels & Resorts back in 2018.
https://en.wikipedia.org/wiki/Park_Hotels_%26_Resorts
The hotel business is horizontally structured, with the operators of the hotel, owners of the real estate, and employer of most of the staff being three different companies.
“America is going out with a wimper and not with a bang.”
I’ll agree on that only AFTER Ukraine gets settled and the Neocons also pull back from prodding China over Taiwan.
But regarding your post, you may also want to note that inner city office space isn’t as ‘shiny’ as it has recently been, and can NEVER recover with Leftists in power, and would have difficulty recovering even with MAGA in power.
San Francisco = Detroit 2.0
Nearly $1.5 trillion in commercial mortgages are coming due
over the next three years, according to data provider Trepp.
WSJ 6/6/23
Urban high rise hotels support business travel. Business travel is much reduced post-Covid due to the use of Zoom, Teams, GoToMeeting. Similarly, office buildings are in much less demand due to work from home, post-Covid.
And people are surprised REITs based on those assets are not doing well?
I’ve been involved in many large real estate loans. What this article intentionally doesn’t point out because it is so busy trying to disparage the REIT is that these loans are designed from the beginning to limit personal liability by ANYBODY. In a default, and barring fraud or malfeasance of some kind by the borrower, the lenders can look only to their collateral. In this case it was hotels.
“Capital Formation” is an ancient process and has many variants. This “loan” is one of them.
Conservatives were funding their craziness.
Wasn’t it Elon that predicted the US commercial real estate market was about to collapse?..................
Two things going on with the Park and Hotels situation.
The REIT is defaulting on the debt. The debt holders will take the property. It’s non-recourse debt, so P&H just walks away from it.
Since this suggests the the debt is more than the value of the buildings, the debt holders presumably sell the property, and take the loss at the amount the FMV of the property is less than the face amount of the debt. (Plus lawyers and transfer costs in the event of a sale).
So, the debt holders take a loss, but don’t lose everything. In this transaction the REIT and its investors are protected, they just get out of a bad deal.
In the larger scheme of things, this indicates dropping values for real estate. This is where the REITs can lose value.
Almost all office building and shopping center loans are non-recourse, meaning that with a few limited exceptions the owners of the entities owning the properties can walk away free and clear. This is going to be a real problem for banks, insurance companies, pension funds and REITs that have interests in loans on those properties. We have not seen anything yet.
I hate debt as an investment. I figure the fat cats have scarfed up all the good deals, leaving the lesser stuff for the retail investors.
The best you can do with that is your crummy 3%, while you risk losing everything.
“I’ve been involved in many large real estate loans. What this article intentionally doesn’t point out because it is so busy trying to disparage the REIT...”
Cool to have someone who was (or is) an insider, and I’ll admit that my bias was formed in run-up to 2008 with those INSANE Option ARMs, which should have NEVER been used for residential real-estate, much less for ‘qualifying’ people who didn’t have a prayer in getting a 30 year fixed.
which should have NEVER been used for residential real-estate, much less for ‘qualifying’ people who didn’t have a prayer in getting a 30 year fixed.
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You are exactly correct!
And, 30 years is too long. 15 years makes a higher payment but it effectively is a savings account that you force upon yourself as it will save about half the interest of a 30 year loan.
Most people don’t know it but in LARGE commercial loans “personal liability” is, ordinarily, just not even talked about anymore. The one thing you (the signor on the note) can and likely will be held personally liable for are taxes and also insurance premiums. On a 750 million dollar building, that’s a huge number.
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