If there’s one thing commercial property owners don’t need right now, it’s a banking crisis.
Already, large homeowners across the country were under pressure from the Federal Reserve’s aggressive campaign to raise interest rates, which pushed up borrowing costs and lowered building values. They also still had plenty of space in inner cities as they had more hybrid and remote work arrangements due to the pandemic.
Now they face the prospect that troubled banks, especially smaller ones, could become more aggressive in lending, giving landlords even less breathing room when trying to refinance a mountain of maturing loans. About $270 billion in bank commercial mortgages is due to expire this year, according to Trepp, with $1.4 trillion over the next five years.
“There were already liquidity problems. Fewer deals were closed,” Xander Snyder, First American senior commercial real estate economist, said in an interview with Yahoo Finance. “Access to capital has become increasingly scarce and this banking crisis will almost certainly make that even worse.”
Most banks that hold commercial real estate mortgages are small- to mid-sized institutions, which have come under the most pressure during the current crisis, which began this month with the spectacular failure of regional lenders Silicon Valley Bank and Signature Bank. Pressure on regional banks continued on Friday, fueled by mounting investor pressure on Deutsche Bank as the cost of insuring against default on its debt soared.
Smaller banks began increasing their exposure to commercial real estate after the 2008 financial crisis, sparked by a real estate crisis, and held on even after the pandemic emptied many downtown properties and other forms of borrowing, commercial mortgage-backed securities and life insurers dried up .
Signature was among the banks that made some of these bets, becoming an aggressive lender on office towers and apartment buildings in New York City. By the end of 2022, the company had amassed nearly $36 billion in commercial real estate loans, half of which was residential. That portfolio comprised nearly a third of his $110 billion fortune.
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Today, more than 80% of all commercial real estate loans are held by banks with assets under $250 billion, according to a report by Goldman Sachs economists Manuel Abecasis and David Mericle. Those loans now make up the highest percentage of industrial loan portfolios in 13 years, according to BNY Mellon’s John Velis.
“There’s been a lot of commercial real estate financed over the last few years,” Rick Rieder, CIO of BlackRock Global Fixed Income, told Yahoo Finance on Wednesday. “When you raise interest rates so quickly, the interest rate-sensitive parts of the economy, and particularly where funding or leverage is involved, you create stress there. It’s not going away tomorrow.” Commercial real estate, he added, doesn’t pose the same kind of systemic risk to the economy as housing did during the 2008 financial crisis, but there are “isolated niches that can lead to contagion risk.”
Two early warnings of the danger posed by rising commercial property rates came last month. Giant landlord Columbia Property Trust defaulted on $1.7 billion in adjustable-rate loans tied to seven buildings in New York, San Francisco, Boston and Jersey City, NJ. That was followed by a default by giant money manager Brookfield Asset Management with more than $750 million in debt covering two 52-story Los Angeles towers.
Signature Bank was a large commercial real estate lender in New York City. It was seized by regulators earlier this month. (AP Photo/Seth Little, file)
More trophy buildings are expected to be forcibly sold at deep discounts in the coming years as owners struggle to refinance at affordable rates. “Sellers will want the price everyone got [back] in December 2021, and buyers are even afraid to buy now because they don’t even know what the price of these buildings is,” Synder said.
Banks were already squeezing commercial home loan conditions before this month’s chaos. According to the Federal Reserve’s latest opinion poll of senior loan officers, nearly 60 percent of banks reported tighter lending standards for nonresidential and multifamily home loans in January.
“Bank lending standards had already tightened significantly in recent quarters to levels not previously seen outside of recessions, presumably because many bank risk departments shared the recession fears rife in financial markets,” Goldman said in a statement Sachs last week. Further tightening of lending standards, expected amid renewed bank stress, could slow economic growth this year, Goldman said.
Federal Reserve Board Chairman Jerome Powell arrives for a news conference in Washington on Wednesday. (AP Photo/Alex Brandon)
Fed Chair Jerome Powell agreed with this view at a news conference on Wednesday following the announcement of another rate hike. He said he also expects credit conditions to tighten as banks pull back, which will help slow the economy. “We’re thinking about doing the same things as raising interest rates effectively,” he said.
But he said regional banks with large amounts of commercial real estate loans are unlikely to become the next Silicon Valley bank.
“We’re aware of people’s concentration on commercial real estate,” he said. “I really don’t think it compares to that. The banking system is strong. It is healthy. It’s resilient. It’s well capitalized.”
According to Hessam Nadji, CEO of Marcus & Millichap, the larger commercial real estate world is still absorbing the shock of the Fed’s aggressive campaign. The impact may not pose systemic risk, he added, but it will add to the many challenges facing the industry.
“Commercial real estate went through a pandemic, recovered very quickly, and then saw a massive tightening in financial conditions unprecedented in modern history,” he told Yahoo Finance on Thursday. “The last three years have taken the industry through a significant roller coaster ride.”
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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