Banking crisis seeps into commercial real estate sector

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Since the collapse of several high-profile regional bank lenders, markets continue to fret amid an emerging banking crisis. The concerns now lie in a potential commercial real estate market crash that rivals the 2008 financial crisis.

Prior to the crisis-inducing fall of SVB Financial Group, the commercial real estate industry struggled due to unfavorable economic conditions and office vacancies caused by a widespread transition to remote work, as previously reported by The Ticker.

Traditionally, most homebuyers would place a down payment, which was followed by a mortgage loan that was given to the buyer from a lender or a bank to purchase a house.

The interest collected from loan payments is a bank’s primary source of income. But rapid interest rate hikes can dissuade borrowers from going to the bank, causing the financial institution to lose additional capital and profits.

During its March meeting, the Federal Reserve announced a 25-basis-point hike for interest rates, noting “the Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run.”

Conditionally, Fed Chair Jerome Powell stressed during a press conference that the collapse of regional banks, such as SVB, Signature Bank and Silvergate Capital Corp., has nothing to do with real estate and that the sector is under control.

In an April 17 investment note, Morgan Stanley Chief Investment Officer Lisa Shalett wrote that analysts at the financial services company forecast a decline in corporate real estate prices that is up to 40% worse than the 2008 financial crisis.

She added that “more than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points.”

Additionally, 80% of commercial real estate lending and 45% of consumer lending in the United States are held by small-sized banks and medium-sized banks, according to Goldman Sachs Group Inc. economists Manuel Abecasis and David Mericle.

Fox Business reported that banks are currently in a credit crunch, which is when they reduce their lending activity and financial risks due to fear of bankruptcy or failure to adhere to debt obligations. These financial institutions responded by tightening lending standards, forcing borrowers to agree to unfavorable terms, which include typically higher interest rates on the borrower.

“There is $1.5 trillion in commercial real estate debt maturing in the next 3 years,” Scott Rechler, CEO of the New York City-based real estate company RXR Realty tweeted. “The bulk of this debt was financed when base interest rates were near zero. This debt needs to be refinanced in an environment where rates are higher, values are lower and in a market with less liquidity.”

In a note reported by Bloomberg, Morgan Stanley analysts said “refinancing risks are front and center” for property owners, adding that “the maturity wall here is front-loaded, so are the associated risks.”

Distress already surfaced with PIMCO, an investment management firm that leads in fixed income across public and private markets around the world, defaulting on $1.7 billion worth of loans tied to office buildings in New York, San Francisco, Boston and Jersey City, according to The Real Deal.

In a poll conducted by Bankrate, economists believed there is a 64% chance of a recession by the end of this year, as of April 5.

“Too high inflation — stubborn. The need to raise rates more. A tight job market. A banking sector with problems. What more could you want?,” Robert Brusca, chief economist at Fact and Opinion Economics and former professor at Baruch College’s Larry Zicklin School of Business, told Bankrate. “Houdini could not negotiate this without crashing.”

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