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Opinion | Commercial Real Estate Is in Trouble. Here’s What to Focus On.


When Jerome Powell, the chair of the Federal Reserve, appeared on “60 Minutes” this past weekend, he said he wasn’t super-worried about the risk of a banking crisis triggered by defaults on office buildings and downtown retail. While acknowledging that the future is uncertain, he said that “it appears to be a manageable problem” for the biggest banks. He said “we’re working” with some smaller and regional banks that have “concentrated exposures in these areas that are challenged.”

As usual when it comes to the Fed, one has to decide whether to be reassured by its reassurances or worried that the folks in charge aren’t worried enough. I wouldn’t say a crisis is imminent, but I do worry that Powell and company are underestimating the risks. I’ve made four charts that explain my thinking.

First, people who discovered the benefits of working from home during the Covid pandemic aren’t continuing to come back. The rebound in working from the office has pretty much stalled, as the following chart shows. It’s based on data collected by Kastle Systems’ optimistically named Back to Work Barometer.

The low occupancy rate is a ticking time bomb for owners of office buildings. When leases expire, tenants won’t want as much space as they have now. Vacancy rates will shoot up. We’re already seeing that happen. Last month Moody’s Analytics announced that the national office vacancy rate rose in the fourth quarter to 19.6 percent, breaking the record of 19.3 percent that was set in 1986 after a period of overbuilding and was then tied in 1991 during the savings and loan crisis.

The need for office space wouldn’t decline very much if everyone came in on the same days and people still needed their old desks. In reality, though, as the chart above shows, occupancy rates are fairly low even on the highest-occupancy days. Plus, some employers are using the days when people are together in the office for team activities that don’t require as much space, Ryan Luby, an associate partner at McKinsey & Company, told me. He coauthored a report for the McKinsey Global Institute last year titled “Empty Spaces and Hybrid Places.”

Hardest hit are owners of Class B buildings (older, not so nice) because their tenants are upgrading to newly vacant Class A space as their leases expire, Alex Horn, the founder of BridgeInvest, a private lender, told me. “The A will make more money than before,” Ilan Bracha, a New York City real estate broker, told me. “Forget about just surviving. But the B and C, there’s no room for them.”

Investors’ fears were awakened last week when New York Community Bancorp, which is exposed to commercial real estate, including office buildings, reported a $252 million quarterly loss. Its stock lost 60 percent of its value from Jan. 30 through Tuesday. The S&P Composite 1500 index of U.S. regional banks fell sharply over concerns about the banks’ exposure to losses in commercial real estate, particularly office buildings. Real estate investment trusts in the office sector also fell.

Delinquencies on private-label commercial mortgage-backed securities on office buildings still aren’t historically high, but they’re back to where they were in 2017, as this chart based on data from Standard & Poor’s Financial Services shows.

“The office market has an existential crisis right now,” Barry Sternlicht, the chief executive of Starwood Capital Group, an investment firm focused on real estate, said at the iConnections Global Alts 2024 conference last week, according to a Reuters report. “It’s a $3 trillion asset class that is probably worth $1.8 trillion. There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is.”

Many building owners refinanced their debt when the Federal Reserve slashed interest rates to combat the Covid downturn. Their debt expenses are likely to skyrocket when their loans mature between now and roughly 2028. The Fed is planning to cut rates this year, but that will leave them still well above prepandemic levels. Goldman Sachs calculated in November that about a quarter of commercial mortgages are scheduled to mature this year and next barring extensions, the highest percentage since its records began in 2008.

An office building owner that doesn’t earn enough in rent to cover the mortgage will ask for or demand concessions from the lender. The building owner has some leverage in the negotiation because the alternative is a default that leaves the lender owning a building that it really doesn’t want, Jon Winick, chief executive of the loan-sale advisory firm Clark Street Capital, told me.

There are some offsetting positive factors. The recent decline in interest rates isn’t enough to prevent all defaults, but helps. Also this week the Federal Reserve issued its quarterly report on the opinions of senior loan officers at commercial banks. As this chart shows, there’s been a sharp decline in the share of domestic banks that are tightening standards for commercial real estate loans, which will ease stress on borrowers. Judging from its actions, the Fed seems to regard the banking crisis as having eased up: It is allowing its Bank Term Funding Program, which it began last March to give banks an easier way to borrow, to expire on March 11.

I’m somewhat reassured by this last bar chart, adapted from a financial stability report that the Fed issued in May. It does show that smaller banks — those with less than $100 billion in assets — are more exposed than the biggest banks to mortgages on office and downtown retail commercial real estate. But even for smaller banks, that exposure is a fairly small portion of their assets.

The darker segment in the bar for smaller banks represents $510 billion in loans. It’s a lot, but still only about 7 percent of those banks’ total assets of $7.4 trillion. And while the value of those loans could fall further, it’s not going to zero. The ability of a bank to withstand losses on such loans “depends critically” on how big a share of the bank’s overall portfolio they account for, the Fed said in its financial stability report.

“Last spring’s mini banking crisis was triggered by surging bond yields and some flight of deposits,” John Higgins, the chief markets economist at Capital Economics, wrote in a client note on Tuesday. “We don’t see one being triggered this spring by C.R.E.,” or commercial real estate.

On the other hand, a recession, which can’t be discounted, would make matters significantly worse. Empty office buildings are going to be a big problem for banks — and for the wider economy — for years to come. We can only hope that the effect will be chronic rather than acute.


“Believing that one makes more money relative to peers causally and meaningfully increases self-reported happiness,” says a new study based on an experiment in which a randomly selected subset of Dutch people were asked to guess how much their peers earned and then were informed what the peers’ actual average earnings were.

People who came to believe they were relatively better off than they had thought became less supportive of income redistribution, seemingly because they decided that income differences incentivize hard work, according to the study, which was released by the National Bureau of Economic Research. The authors are Maarten van Rooij of the Dutch Central Bank, Olivier Coibion of the University of Texas at Austin, Dimitris Georgarakos of the European Central Bank, and Bernardo Candia and Yuriy Gorodnichenko of the University of California at Berkeley.


“Guess all the happiness in the world can’t buy you money.”

— Toby Keith, “Can’t Buy You Money” (2006)



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