Posted on 04/10/2023 9:17:29 AM PDT by cutty
The wall of debt is set to get worse before it gets better. Maturities climb for the coming four years, peaking at $550 billion in 2027.
Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025. The big question facing those borrowers is who’s going to lend to them?
“Refinancing risks are front and center” for owners of properties from office buildings to stores and warehouses, Morgan Stanley analysts including James Egan wrote in a note this past week. “The maturity wall here is front-loaded. So are the associated risks.”
The investment bank estimates office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults.
Adding to the headache, small and regional banks — the biggest source of credit to the industry last year — have been rocked by deposit outflows following the demise of Silicon Valley Bank, raising concerns that will crimp their ability to provide finance to borrowers.
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Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025. The big question facing those borrowers is who’s going to lend to them?
“Refinancing risks are front and center” for owners of properties from office buildings to stores and warehouses, Morgan Stanley analysts including James Egan wrote in a note this past week. “The maturity wall here is front-loaded. So are the associated risks.”
The investment bank estimates office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults.
Adding to the headache, small and regional banks — the biggest source of credit to the industry last year — have been rocked by deposit outflows following the demise of Silicon Valley Bank, raising concerns that will crimp their ability to provide finance to borrowers.
...
The wall of debt is set to get worse before it gets better. Maturities climb for the coming four years, peaking at $550 billion in 2027, according to the MS note. Banks also own more than half of the agency commercial mortgage-backed securities — bonds supported by property loans and issued by US government-sponsored entities such as Fannie Mae — increasing their exposure to the sector.
“The role that banks have played in this ecosystem, not only as lenders but also as buyers,” will compound the wave of refinancing coming due, the analysts wrote.
Rising interest rates and worries about defaults have already hurt CMBS deals. Sales of the securities without government backing fell about 80% in the first quarter from a year earlier, according to data compiled by Bloomberg News.
Amid the gloom, there are some slivers of good news. Conservative lending standards in the wake of the financial crisis provide borrowers, and in turn their lenders, with some degree of protection from falling values, the analysts wrote.
Sentiment toward multifamily housing also remains much more positive as rents continue to rise, one reason why Blackstone Real Estate Income Trust had a positive return in February even as rising numbers of investors lodge withdrawal requests. The availability of agency-backed loans will help owners of those properties when they need to refinance.
Perhaps of interest.
Inflation will be 200-300% by then, so it won’t matter.
That’s a ‘wall’ Biden and the Democrats want to build higher...................
Debt on commercial property is mostly held by larger banks and institutions. The “too big to fail” crowd that owns our government.
They will bail them out and many “republicans” will vote yes, as always.
No so much.
Sounds counter intuitive, but most commercial paper is held by smaller and regional banks.
Thank you Joe... always thinking of me.
If it isn’t rented, housing conversion is possible.
“$550 billion”
About the value of one company’s cell phone business.
If the price is right, most property can be rented.
If you have ten vacant spaces, run an auction, with no minimums on say five of the spaces.
For commercial property that has a mortgage on it, the real question is: Can the landlord charge enough rent to cover the mortgage payments?
What is already happening is some REITS are refusing to let their investors withdraw all or part of their money.
That is a waving red flag to any future investors.
Rising interest rates and worries about defaults.
All neon arrows pointing the Wight House.
Recession not that far away and nobody in control
I was not aware Fannie Mae bought commercial loans. And according to their website, they do not - although they do buy loans on multi-family housing units.
This article is not clear on this.
The price is not right because too many properties are "poker chips" in a larger investment game. The nominal value of the "poker chip" is based on the "list price" of the rental rates for the properties rather than the actual rents being collected.
I am seeing office properties with 80% vacancy rates where the owners are still raising rents on the remaining tenants when the leases expire. Of course, the tenants move out. But the prospective sale price for the property is based on the new higher rent per square foot - and an 80% occupancy rate, which is not going to happen.
Loans against those properties are based on that inflated valuation suggested by the nominally higher rental rates and unreachable occupancy rates. Investors who own the properties must have enormous cash reserves, or they are underwater with their loans to banks.
Maybe the property owners are not as dumb as they appear to be.
In the metro area nearest to me there are several enormous projects downtown, where office buildings are being converted to residential apartment complexes. They seem to fill them with renters as fast as they can finish them.
I wonder if the new residents "work from home".
In the suburban ring there seems to be a number of projects where large apartment complexes are built in the former parking lots of an empty shopping mall. Those also fill up as fast as they are completed.
Building for conventional single-family detached homes has dropped to almost zero around here.
Ok, so play it out and how does it work?
JP Morgan, Chase, BofA, and the others will be “forced” by the government to buy out the competitors at discount prices, assume the bad debts, and we will bail them out. To do otherwise creates more panic in the banking industry.
I am not trying to be argumentative, but recent history demonstrates that the probable outcome is what I wrote above.
There is also a matter of which properties are most at risks with the highest debt to capital ratios. These are generally not the little retail spaces that are most in danger, it is the post-Covid high dollar properties that lost tenants in big cities. My understanding from credible market folks is that much of that market is owned directly by the big boys.
If I am wrong or you have better knowledge I will gladly defer, but I suspect a bail out is coming and given recent history you can bet it will mostly benefit the big 5 banks and Blackrock with my kids on the hook for it.
It's easy to see what's happening here. Picture a hypothetical commercial property owned by a REIT. Suppose they acquired it five years ago for $100 million, and it was financed through a $75 million mortgage based on a maximum 75% loan-to-value ratio.
Now, suppose the initial five-year mortgage term is ending. The mortgage has a remaining balance of $70 million. Under normal circumstances they'd look to renew the mortgage for another five-year term for the full $70 million. However, the appraisal for the property indicates that it is now worth only $80 million. Based on a maximum loan-to-value ratio of 75%, a lender will only allow the REIT to borrow $60 million against the value of the property to renew the mortgage. The REIT has to come up with $10 million cash to pay the balance of the mortgage down to $60 million in order to renew it.
Now multiply this one scenario by thousands of commercial mortgage renewals across the U.S. The REITs aren't allowing the investors to withdraw their funds because they need a pile of cash on hand to pay down the mortgages just to renew them.
I don't know any bank or institutional lender that will extend a loan against a property based on a "nominal value." In every situation I've come across with clients and investment partners, the bank demands to see existing leases in place as part of the appraisal process. If a property is listing space for $40 per square foot and is 80% vacant, then I don't know anyone with half a brain who will accept that $40 as the basis of the appraised value for lending purposes.
I would expect that a prospective buyer or lender would do as you say. But I find "listed prices" for commercial real estate that are clearly based on the highest rental rates charged at the property with no factor for occupancy rates or actual rents collected.
Caveat Emptor, I suppose. Or maybe the current thinking is based on P.T Barnum; "There's a sucker born every minute".
I do notice that those properties do not appear to be selling very quickly. Or at all. But the rents keep going up. And tenants keep leaving without being replaced. Somebody has deep pockets.
Commercial property costs are insane. They suck the profit from any company leasing from them.
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