Hopes that lower borrowing costs would ease the pain from the U.S. office slowdown faded this week.
Deutsche Bank Save more money Blackstone mortgage trust to close due to US commercial real estate loan problems Dividends were cutNew York Community Bancorp Inc.’s shares fell the most since the CRE-related turmoil in March after the bank said it would take more than double the amount of losses analysts had expected.
The announcement suggests it may not be enough for lenders to simply modify or extend loans in the hope that lower interest rates will ease the pain for borrowers and give property owners more time to repay. Refinancing debtAccording to MSCI Real Assets, more than $94 billion of U.S. commercial real estate is currently in distress, with an additional $201 billion at risk of becoming distressed.
“With $1.5 trillion in loan repayments coming due over the next two years, the impact will be huge,” say John Murray and Francois Trauch of Pacific Investment Management. I have written “Lenders and borrowers will be forced to ‘face reality’ as in the near term we expect valuations and price indexes to fall further, making loan extensions even more difficult to rationalise,” they said in a note this week.
The bad news started when Deutsche Bank said it expects its U.S. office division to continue to impact earnings in the coming months, but that it expects CRE provisions to fall in the second half of the year. Later that day, short-seller target Blackstone Mortgage Trust reported a quarterly loss of $61 million, compared with a profit of $101.7 million a year earlier. The company 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 office loans.
“The rising impairments suggest that asset revaluations are still underway for lenders and other institutions with real estate-related exposure,” Tolu Alamutu, senior credit analyst at Bloomberg Intelligence, said of the industry outlook. “Further corrections cannot be ruled out as transaction volumes creep up. While these figures may pale in comparison to last year, they could still have an impact.”
Credit investors remain reassured that CRE disruption will be contained, and risk premiums on bank bonds have increased less than the overall market, suggesting that bank bonds are outperforming the market.
Private Credit
Private credit providers see an opportunity to profit as borrowers approach maturities: CRE debt funds are looking to raise about $50 billion in capital in the near term, according to research firm Green Street, and some are considering buying distressed loan portfolios from banks.
“With its strong liquidity, accelerated repayments and new investment pipeline, BXMT is well positioned to allocate capital aggressively in this environment and continue to advance through economic cycles,” Katie Keenan, CEO of Blackstone Mortgage Trust, said in a statement.
Pimco’s Murray and Trausch write that both senior and mezzanine debt present opportunities for investors, but they warn that the damage to CRE will be felt long after the Fed begins to ease monetary policy.
The forward curve suggests that borrowing costs will keep commercial property values ​​20% to 40% below their 2021 highs, they said, adding: “The headwinds hitting the commercial real estate market will result in a significantly slower recovery than seen after the global financial crisis.”
