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Some $1.5 trillion in mortgages will come due in the next two years – paving the way for a potential financial crisis as higher interest rates push down property values.
As this event looms, big banks such as Wells Fargo are already cutting their losses by preparing to offload debts at a discount even when borrowers are up to date – a sign of their lack of faith in the once stalwart commercial real estate market.
Meanwhile, higher interest rates meant to hamper inflation continue to push down property values by deterring buyers – a phenomenon compounded by continued office vacancies.
The pandemic-induced phenomenon comes as remote work has maintained prominence since its surfacing during the pandemic – and advent that has hammered offices, and now the banks’ providing them property loans.
The willingness of some lenders to take losses on real estate loans that as of now are performing comes as multiple experts continue to warn the asset class is the ‘next shoe to drop’ following the recent turmoil in the banking industry – increasing the likelihood of another recession wrought by a mortgage crisis.
Some $1.5 trillion in mortgages will come due in the next two years – paving the way for a potential financial crisis as higher interest rates push down property values. Pictured: An empty office building
The phenomenon has been further compounded by office vacancies , as a sizable amount of Americans continue to work from home even after the pandemic. This graph shows work from home data among Americans from 1965 through 2023, which remains elevated
‘Am I worried? The short answer is, ‘yes’. The long answer is, ‘hell yes,” Senior Senate Banking Committee member John Kennedy told Politico Monday of what many say is the next big threat over the US economy.
‘I hope the Federal Reserve and the banking regulators are worried as well, and I hope they won’t be caught flat-footed like they were with the bank failures that we’ve had so far,’ the of Louisiana Senator added, in reference to SVB’s collapse this year.
In comments to The Financial Times, Chad Littell, an analyst at a major research firm that tracks commercial real estate, added that prominent players such as HSBC’s recent decisions to unload outstanding debts at a loss comes as a red flag.
‘The fact that banks want to sell loans is coming up in a lot of conversations,’ Littell, who works for New York-based CoStar, said Monday in a similar interview.
The finance expert further remarked of what he said is a clear sign of the bank’s determination to reduce their exposure to an increasingly unstable market: ‘I am hearing more about it than any time in the past decade.’
At the time of writing, HSBC is in the process of pawning off hundreds of millions of dollars worth of held-up commercial real estate loans potentially as a discount, as part of a burgeoning effort to wind down direct lending to property developers – who many say are poised to default come 2025.
Also taking part in this preemptive effort is PacWest, who in May unloaded $2.6illion worth of construction lending contracts at a loss.
Firms like JP Morgan Chase, meanwhile, are ordering its managers return to the office full time after years of remote work, during which most of their more than 40 US offices were left vacant despite being pair for.
‘Am I worried? The short answer is, ‘yes’. The long answer is, ‘hell yes,” Senior Senate Banking Committee member John Kennedy said Monday of the looming commercial real estate crisis – an increasingly likely event that many say is the next big threat over the US economy
In comments to The Financial Times , Chad Littell, an analyst at a major research firm that tracks commercial real estate, added that prominent players such as HSBC’s recent decisions to unload outstanding debts at a loss is indicative of banks’ waning faith in property owners
Putting further pressure on both the real estate industry and banks is the fact that the Fed last month issued its tenth consecutive interest rate hike in a matter of months by a quarter point – a threat the agency’s Chair, Jerome Powell (pictured), last month sought to downplay
A few days later, however, FDIC Chair Martin Gruenberg issued a statement that seemed to contradict the Fed boss’ assertions, stressing at a May 31 press conference that the looming deadline for commercial real estate loans stands as a significant risk
The finance expert further remarked of what he said is a clear sign of the bank’s determination to reduce their exposure to an increasingly unreliable market as demand wanes and thousands of offices remain empty: ‘I am hearing more about it than any time in the past decade’
Meanwhile, higher interest rates meant to hamper inflation continue to push down property values by deterring buyers – a phenomenon compounded by the continued office vacancies
The reasoning for the decision, aired by brass in a memo obtained by the Wall Street Journal, was so staffers could be present for ‘impromptu meetings’ and that senior employees could play a more ‘critical role in reinforcing’ the banks’ work culture.
Meanwhile, a host of other banks have implemented changes that would make it easier to execute similar sales in the near future, as roughly 70 percent of bank-held commercial mortgages still sit on balance sheets of both regional and small lenders.
About $1.5 trillion worth of those loans are set to mature over the next two years – at a steep increase – due to stricter lending conditions and unsustainable rates created wrought by the Fed.
While coming as bad news to landlords looking for a new lease for their office buildings, the prospect of a widespread default and subsequent dips in demand could stifle construction and development in major US cities – many of which are still struggling to recover in the aftermath of the pandemic.
Putting further pressure on both the real estate industry and banks is the fact that the Fed last month issued its tenth consecutive interest rate hike in a matter of months by a quarter point – a threat Chair Jerome Powell has largely downplayed.
‘Banks and the banking system are strong and resilient, and well-positioned to deal with the challenges they may face now or in the future,’ Powell insisted to Bloomberg in an interview late last month.
‘While the financial stability tools helped to calm conditions in the banking sector, developments there on the other hand are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation.
‘So as a result, our policy rate may not need to rise as much as it would have otherwise to achieve our goals. Of course the extent of that is highly uncertain.’
On Wednesday, Fed boosted its benchmark rate by a quarter-point. Credit card and auto loan rates follow the Fed’s rate moves most closely, and are likely to rise further
Last week, mortgage buyer Freddie Mac reported that the average rate on the benchmark 30-year mortgage edged up to 6.43 percent from 6.39 percent the week prior
Firms like JP Morgan Chase, meanwhile, are ordering its managers return to the office full time after years of remote work, during which most of their more than 40 US offices were left vacant despite being pair for
Shares at regional banks have fallen following the collapse of First Republic Bank on May 1 – the third in a matter of months – potentially playing a part in recent decisions to reduce exposure to the commercial real estate market
A few days later, however, FDIC Chair Martin Gruenberg issued a statement that seemed to contradict the Fed boss’ assertions, stressing at a May 31 press conference that the looming deadline for commercial real estate loans stands as a significant risk.
‘The banking industry continues to face significant downside risks from the effects of inflation, rising market interest rates, slower economic growth, and geopolitical uncertainty,’ Gruenberg said of the likelihood of a commercial mortgage crisis.
‘Credit quality and profitability may weaken due to these risks and may result in a further tightening of loan underwriting, slower loan growth, higher provision expenses, and liquidity constraints.
‘Commercial real estate portfolios, particularly loans backed by office properties,’ he added, ‘face challenges should demand for office space remain weak and property values continue to soften.
‘These will be matters of ongoing supervisory attention by the FDIC.’
That warning – as well as an allotment of others from high-profile figures including Elon Musk in recent months – within a few days warranted a response from the Fed, one in which the agency seemed to accept the commercial real estate market could soon surface as an economic threat
‘The magnitude of a correction in property values could be sizable and therefore could lead to credit losses,’ analysts who penned the agency’s Financial Stability Report for the month of May wrote.
As this fear of an increase in delinquencies continue to rise, commercial real estate stocks are down. An index of publicly traded commercial real estate investment trusts has fallen 18.1 percent since this time last year as of June 2, while other real estate data shows that few commercial buildings are being sold more than three years after the coronavirus surfaced in the US.
Last week, Wells Fargo chief executive Charlie Scharf told analysts that the bank, which currently has $142billion in commercial real estate loans, is weighing its exposure to the area.
‘We will see losses, no question about it,’ he said.
Stances from other big players have been largely the same, as an air of uncertainty continues to linger as to how much value the commercial real estate market has truly shed in the past few years.
JP Morgan CEO Jamie Dimon has been open about his desire to bring back workers full time, previously stating he was worried the $3 billion Park Avenue building was not being used as much as it should be.
In August, DailyMail.com reported that Dimon was worried that the 70-floor Manhattan building would sit empty if staff continued to work from home.
The memo sent out this week appears to address the previous concerns.
‘We need them to lead by example, which is why we’re asking all managing directors to be in the office five days a week,’ the memo states.
Currently, most employees are working hybrid between home and in office three days per week. Some employees may work more with prior approval.
On the West Coast, Walt Disney Co. announced in March that they would bring employees back to the office four days per week.
The move was met with major pushback as more than 2,000 employees signed a petition to stop the return to office order.
The mandate, the employees claimed, would lead to ‘forced resignations among some of our most hard-to-replace talent and vulnerable communities’ while also ‘dramatically reducing productivity, output, and efficiency.’
‘Sitting on Zoom calls in an office for four days a week while your co-workers, partners, stakeholders, vendors, and customers do the same in a different part of the world does not meet the core need,’ the petition states.
‘There is value in being together, but we also need to look forward and embrace new paradigms that add value,’ it continues.
Major employers have been pushing to bring workers into the office since the COVID-19 pandemic began and have recently ramped up efforts as fears over the coronavirus subside.
Meanwhile, after the crash of First Republic on Monday – the third bank failure in the past two months – experts and consumers have been anxious to determine whether it spelt the end of turmoil, or the start of a worsening crisis.
The US housing market is also currently in the midst of an unprecedented decline in home prices – with properties in some cities selling for hundreds of thousands of dollars less than they were just a year ago.
Two cities in the Bay Area – Oakland and San Francisco – are among the worst offenders when it comes to decline by dollar amount, a phenomenon researched said is fueled in part by diminishing demand and the looming possibility of a recession.
Other notable declines occurred in major metros like Austin, Boise, Salt Lake City, Seattle, and Los Angeles – all of which saw their median home price shed at least $60,000 since April of last year.
Many of those decreases were fueled by a mass migration of workers out of major hubs amid the advent of remote work – which continues to persist today, data shows.
Source: DailyMail UK