Maroc - EURASIAREVIEW.COM - A la une - 20/Mar 23:51

Commercial Real Estate Is In Serious Trouble – OpEd

By Douglas French While the financial press is attempting to cover Trump’s frenetic bipolar tariff policy, the ponderous commercial real estate market continues to deteriorate. Bisnow.com reports, citing CoStar, “US banks reported delinquencies hit 1.57 percent at the end of last year, a rate not seen since the fourth quarter of 2014.” Putting a number to the percentage, “The 1.57 percent delinquency percentage means more than $47.1B of loans would have been delinquent at the end of the year,” writes Billy Wadsack for Bisnow’s Dallas-Fort Worth bureau. That’s an 88 percent increase from a decade ago. Delinquencies in CMBS (Commercial Mortgage-Backed Securities) are setting multi-year highs with $38B in arrears at year-end 2024, a 41 percent increase from the previous year end. In the face of troubling news, those who work in real estate are taking a rosy view, as usual. James Robertson, Jr. writes in the latest Grant’s Interest Rate Observer, “Optimism in the industry is the highest it has been in eight years.” This industry he calls “illiquid and slow-moving” with cycles that can “drag on for years.” There has been little transaction volume and sellers have held tightly to the valuations and cap rates experienced during days of ZIRP. Likewise, bankers have extended and pretended, hoping the never-before-seen low rates will miraculously return to lift all boats (and buildings). Fitch Ratings’s Melissa Che told Robertson, “As more lower-quality assets, some of which have significantly deteriorated in performance, come to market and trade at relatively low prices, this may trigger an overall reset and further price discovery across various property quality segments.” Distressed market sales nearly doubled to 6 percent in last year’s fourth quarter, according to Newmark Group, Inc. Banks are growing more impatient with loan extensions and modifications raising the amount of 2025 debt maturities to $957 billion from $659 billion from 2022. Newmark believes a third of CMBS loans fail to cover debt services. Robertson focuses on bridge loans (REBLs) whose issuance ballooned in 2021 to $45 billion from less than $9 billion the year prior. Artis Shepherd of Patterson Capital, LLC told Robertson, “Bridge lending shifted around this time into a fairly aggressive product. Some lenders were offering credit at 80 percent-85 percent loan-to-value ratios and underwriting loans based upon proforma rather than actual net operating income.” Shepherd goes on to explain that 2021 bridge lender’s loose underwriting included debt service coverage of just 1.0 or 1.05 to pro forma numbers rather than the traditional 1.25 DCR (Debt Service Coverage Ratio). This has come back to bite lenders and REITs. Borrowers whose loans are maturing must confront interest rates which are 300 bps higher than what they are paying. If they are paying at all. In Robertson’s piece he gives the example of the Starbucks Seattle HQ building. The current rate is 2.3 percent. However, the loan matures in August and Harsh Hemnani of Greenstreet told Robertson “If spreads and rates stay the same, it’s going to be somewhere around 5.5 percent. The owners will have to eat the difference. I think that pain is definitely going to happen.” If Starbucks is your tenant, you take the hit. Owners with lesser quality tenants (or none at all) will likely walk away. Office properties are not the only problem. Overbuilding of multi-family projects has put pressure on rents. Community banks hold $629.7 billion in apartment loans with $6.1 billion being 30 days or more delinquent. This is the most since 2012 the tail-end of the Great Financial Crisis. Researchers at the NY Fed are on high alert concerning the coming CRE maturity wall, believing banks are undercapitalized. “For example, regulators, credit rating agencies and providers of funding might scrutinize bank maturity extensions more closely, thus forcing banks to accept defaults rather than granting more maturity extensions.” These defaults could lead to deposit runs and/or “trigger a wave of foreclosures or sales of loans in secondary markets, imposing fire-sale externalities on other intermediaries by depressing the market valuations of CRE debt and underlying CRE properties.” Wall Street has a close eye on the banks with the Regional Bank ETF (KRE) having fallen 18 percent since hitting a high around last Thanksgiving. The President says his favorite word is “tariff.” As an ex-real estate developer, his least favorite is likely “maturity.” About the author: Douglas French is President Emeritus of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply, and author of Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master’s degree in economics from UNLV, studying under both Professor Murray Rothbard and Professor Hans-Hermann Hoppe. His website is DouglasInVegas.com. Source: This article was published by the Mises Institute