The next shoe to drop on banks: Commercial properties requiring refinancing

Discussion in 'Other News' started by autopaint, Mar 22, 2023.

  1. autopaint

    autopaint Light Load Member

    Jul 26, 2019
    If you don't know, a commercial loan typically has a fixed rate for 5-7 years, sometimes ten years. This is because the banks hold these loans on their books in-house. They don't sell them to Fannie or Freddie like a home mortgage.

    In 2023, $270 Billion worth of commercial properties, from garages to strip centers to warehouses, will be forced to re-fi at a much higher interest rate with most likely lower property value than in years passed. The owner might not be able to make the much higher payment or the office building might be worth 30-40% less due to the work-from-home folks, so the owner hands the bank the keys.

    Commercial Property Debt Creates More Bank Worries

    A record amount of commercial mortgages expiring in 2023 is set to test the financial health of small and regional banks already under pressure following the recent failures of Silicon Valley Bank and Signature Bank.

    Smaller banks hold around $2.3 trillion in commercial real estate debt, including rental-apartment mortgages, according to an analysis from data firm Trepp Inc. That is almost 80% of commercial mortgages held by all banks.

    With the banking industry in turmoil, regulators and analysts are growing increasingly concerned about commercial real estate debt, particularly loans backed by office buildings, according to industry participants. Many skyscrapers, business parks and other office properties have lost value during the pandemic era as their business tenants have adopted new remote and hybrid workplace strategies.

    High interest rates also have wreaked havoc with commercial property valuations. Many owners with floating-rate mortgages have to pay much more monthly debt service, cutting into their cash flows. Owners with fixed-rate mortgages will feel the pain of higher rates when they have to refinance.

    This year will be critical because about $270 billion in commercial mortgages held by banks are set to expire, according to Trepp—the highest figure on record. Most of these loans are held by banks with less than $250 billion in assets.

    If those loans pay off, it would reassure markets. But a large number of defaults could force banks to mark down the value of these and other loans, analysts say, reinforcing fears over the financial health of the U.S. banking system.

    Many of these borrowers will have a hard time paying off their loans, said Tomasz Piskorski, the Edward S. Gordon professor of real estate at Columbia Business School. “The destruction of value is quite big,” he said.

    While a number of banks have seen drops in the value of their bondholdings—a key factor in Silicon Valley Bank’s collapse—figuring out by how much the value of their mortgages has dropped is trickier because they aren’t publicly traded and every building is different.

    In a recent paper, a group of economists including Mr. Piskorski estimated that the value of loans and securities held by banks is around $2.2 trillion lower than the book value on their balance sheets.

    That drop in value puts 186 banks at risk of failure if half their uninsured depositors decide to pull their money, the economists estimate. Real-estate loans account for more than a quarter of the shortfall, said Mr. Piskorski.

    At the median U.S. bank, commercial real-estate loans account for 38% of loan holdings, according to an analysis by KBW Research.

    The good news is that banks lent more conservatively in recent years compared with the period before the 2008 financial crisis. Many buildings might still be worth more than their mortgages even if they suffer a loss in value.

    “The saving grace here is that you do have a decent-sized cushion,” said Frank Schiraldi, a stock analyst at Piper Sandler.

    Also, government regulators have given banks ways to avoid taking losses even when loans are in trouble and are restructured to give borrowers more time and more flexibility to pay what they owe. Much of the guidance the Federal Reserve and other regulators are following was enacted during the global financial crisis to shore up the economy.

    Commercial Property Debt Creates More Bank Worries
    blairandgretchen and drvrtech77 Thank this.
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