Commercial real estate crash: Lower rates won't save offices

Deutsche Bank A.G set aside more money to tighten US commercial real estate loans, while a black rock Inc. mortgage trust cut its dividend. Shares of New York Community Bancorp then fell the most since the last CRE-related crisis in March, after provisions for losses came in at more than twice the average expected by analysts.

The announcements indicate that lenders may not be able to modify and extend loans in the hope that lower interest rates will ease pain for borrowers and give homeowners more time to refinance the debt. According to MSCI Real Assets, more than $94 billion of U.S. commercial real estate is currently distressed, with another $201 billion at risk of falling into that category.

“As a wall of $1.5 trillion in loan maturities hits over the next two years, the implications are profound,” said John Murray and François Trausch of Pacific Investment Management Co. he wrote in a note this week. “Borrowers and borrowers will be forced to 'face the music': in the short term, we expect further declines in valuations and price indices, making loan extensions even harder to rationalize” .

The bad news started when Deutsche Bank said the US office sector will continue to weigh on earnings in the coming months, although it expects CRE provisions to be lower in the second half. Later in the day, Blackstone Mortgage Trust Inc., a target for short sellers, reported a quarterly loss for the trust of $61 million compared with a profit of $101.7 million in the same period last year. previous year It cut its dividend by 24%.

The next day, New York Community Bancorp said it set aside another $390 million in the second quarter to cover loan losses, mostly from branch loans.

“The higher impairments suggest that asset revaluations may still be at work for lenders and others with real estate exposure,” Tolu Alamutu, senior credit analyst at Bloomberg Intelligence, said of the industry outlook. “As transaction volumes increase, further adjustments cannot be ruled out. These marks may soften compared to last year, but may still have an impact.”

Credit investors are confident that CRE turbulence will be contained, with bank bond risk premiums rising less than the broader market, showing they are outperforming.

Private Credit

Private credit providers see an opportunity to profit as borrowers approach the walls of maturity. CRE debt funds are looking to raise about $50 billion in short-term capital, with some considering buying portfolios of bad loans from banks, according to researcher Green Street.

Katie Keenan, chief executive of Blackstone Mortgage Trust, said in a statement: “With strong liquidity, accelerated repayments and an emerging investment portfolio, BXMT is well positioned to deploy capital appreciably in this environment and continue its trajectory advanced throughout the cycle”.

There are opportunities for investors in both senior and mezzanine debt, Murray and Trausch wrote in Pimco, although they cautioned that CRE damage will be long-lasting even if the Federal Reserve begins to loosen monetary policy.

Forward curves suggest borrowing costs will keep commercial property values ​​20% to 40% below 2021 highs, they said, adding that “headwinds affecting the commercial real estate market will result in to a materially slower recovery than that seen after the global financial crisis.”