Any hopes that falling borrowing costs would ease the pain of the U.S. office building downturn were dashed this week.
Deutsche Bank set aside more money for distressed U.S. commercial real estate loans, while Blackstone Corp. Mortgage Trust slashed its dividend. Shares of New York Community Bancorp subsequently fell the most since the last round of CRE-related turmoil in March after the bank set aside for losses more than double analysts’ average forecast.
The announcements signal that lenders may not be able to simply modify and extend loans in hopes that lower interest rates will ease the pain for borrowers and give homeowners more time to refinance their debt. More than $94 billion in U.S. commercial real estate is currently in trouble, with another $201 billion at risk of falling into the category, according to MSCI Real Assets data.
“Over the next two years, there will be a lot of uncertainty over the next two years,” John Murray and François Trausch of Pacific Investment Management Co. As the $1.5 trillion loan maturity wall arrives, the impact is profound: “Lenders and borrowers will be forced to ‘face reality’: in the short term, we expect further declines in assessed valuations and price indexes, allowing loan extensions. Even harder to rationalize. “
The bad news started when Deutsche Bank said the U.S. office building industry will continue to weigh on earnings in the coming months, although commercial real estate provisions are expected to fall in the second half. Later in the day, Blackstone Mortgage Trust Inc., a target of short sellers, reported a quarterly loss of $61 million, compared with a profit of $101.7 million a year earlier. It cut its dividend by 24%.
The next day, New York Community Bank said it would set aside another $390 million in the second quarter to cover loan losses, mainly on office loans.
“Higher impairments suggest that lenders and others with real estate exposure may still be vulnerable,” Tolu Alamutu, senior credit analyst at Bloomberg Intelligence, said of the sector’s outlook. A revaluation of assets is underway. “As volumes gradually increase, the possibility of more corrections cannot be ruled out. The traces may pale in comparison to last year, but could still have an impact.
Credit investors remain confident that turbulence in commercial real estate will be contained, with risk premiums on bank bonds rising less than the broader market, suggesting they are outperforming.
private credit
As borrowers approach maturity, private credit providers see opportunities to profit. CRE debt funds are seeking to raise about $50 billion in capital in the short term, with some considering buying damaged loan portfolios from banks, researcher Green Street said.
Katie Keenan, chief executive of Blackstone Mortgage Trust, said in a statement: “With strong liquidity, accelerating repayments, and an emerging investment pipeline, BXMT is well-positioned to deploy capital in this environment and continue through the cycle. its trajectory.
There are opportunities for investors in both senior and mezzanine debt, Pimco’s Murray and Trausch wrote, though they cautioned that the damage to commercial real estate will be long-lasting even as the Fed begins to ease monetary policy.
They said the forward curve suggests borrowing costs will keep commercial real estate values 20% to 40% below their 2021 highs, adding that “the headwinds facing the commercial real estate market will result in a significantly slower recovery than after the global financial crisis.” speed.
