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21 thoughts on “Commercial Real Estate Doom Loop”

  1. This is the paragraph that makes the whole article:

    “Banks with less than $250 billion in assets held about three-quarters of all commercial real-estate loans as of the second quarter of 2023, the Journal’s analysis shows. They accounted for nearly $758 billion of commercial real-estate lending since 2015, or about 74% of the total increase during that period.”

    The way I read this is that investors with stock, preferred stock or bonds on *any* bank with $250B or less in assets can easily see their investment zeroed out on any given Sunday afternoon while JPM negotiates yet another sweetheart deal with regulators.

    I’ll pass on the parts of the banking sector that are not too big to fail.
    Will also pass on anything with CMBS exposure.

    The returns are simply not there given the risks IMO

    1. A quick check and have all above that threshold with LNC, MS (preferreds) and JPM (short-term bond). You make a great point. My one thought was LNC but it’s an old bank with well above $250B in assets.

  2. The darkly hilarious part here is that OZK is mentioned sentence one – and ever-defiant, they’ve been raising their divvy quarter after quarter after quarter projecting an image of “what? us worried?”. Good for a laugh every time, but it’s so audacious that one never knows what they might have up their sleeve.

    Using derivatives for cover, have flipped OZK 1/2 dozen times+ in the last few years for a 93% gain/initial capital. Entire deep ITM position was called last Friday. After this WSJ article it’s untouchable for me.

    Glaringly obvious is that a sector vacancy rate circa 17% (near 20% in SF and 14% in mid-town Manhattan), will end in pain no matter what the man behind the curtain says. Could resemble a slow motion train wreck as various levels of staying-power evaporate or LLCs (Brookfield-like ownership structures) just walk away one property at a time.

    Plenty o’ OPM will be wiped out especially within the private market/alternative investment platforms which consistently over-expose at Mezzanine level. (but they keep their up-front origination fees and start over after the smoke clears)

    At least the first few steps of another panic-driven buying-opportunity are in place.

      1. fc, Nothing in those financials appears anything but stellar. Just look at RE, up $250M between periods – yet we know they’ve been playing monopoly outside of their sandbox with clients the local big banks wouldn’t touch. Will be an interesting one to watch.

    1. You notice the chart showing the percent of loans held from 23 to 30 and the banks exposure tapers off after 2027, but the grey area is at least 50% of “other” lenders from 2023 to 2030
      It mentions private and government lenders , and “insurance companies”, Then on the CMBS substitute commercial mortgage reit companies I wonder how much they are holding.
      If current fire sale prices are any indication your talking about a 50% haircut.
      On the government end how many cities, counties, quasi government agencies floated redevelopment bonds for real estate? Not to mention the property tax cuts to income the cities are going to take a hit on.
      In this possible nightmare don’t just worry about regional banks.

      1. Charles – regarding the question of Commercial mREITS I looked at the following 5: ACRE, BXMT, STWD, LADR, ARI. Total assets add up to about $121B. P/B ratios actually quite high for the larger names: STWD trades at about 1X book and BXMT is about .87. The lowest P/B is .67. Typical current yields are STWD 9.45%, BXMT 10.85%, ARI 13.26% as examples.

        I left ABR out as they invest in multi family residential which does not have the same problems as hospitality, office and retail.

        My issue is that I don’t see any reason to buy any of these. The yields are not there in comparison to alternatives and the P/B is too high (near 1) for the larger names. Given the alternatives to me the better approach is to buy Residential mREIT variable rate preferred and take the 10% dividends.

        Another alternative would be AGNC trading near book with a 15% yield, no credit risk but lots of leverage & interest rate risk. I’ll take this one when (if) the Fed starts to actually cut rates.

        You can pick your poison in the mREIT space:
        agency mREITS lots of leverage risk, rate risk and no credit risk
        commerical mREITS lots of credit risk, same rate risk and much less leverage risk.

        I’ll skip it and take the NLY F&G and leave it at that – till they get called anyway.

        1. Thanks August, I know you follow this area of the market. Does sound like your staying out of the water or just treading water waiting for the opportunity to toe back in? I am in AGM preferred but don’t have a full position. Feel like this sector could drop farther if this segment of the market drops as a whole.

          1. Hey Charles – I have about 25% of my FI book in mortgage related assets. My larger positions are in the NLY F&G and Fannie 5.5 Coupon MBS bonds. I have some Freddie term notes. I don’t call it treading water. I am a buyer of Fannie 6% coupon MBS bonds, but I am still waiting for that blow par offer.

  3. Good article ~ if FED stays at higher for longer, or just longer, the cracks in commercial REITS & softer regional banks will deepen IMHO.

  4. Tim, I was reading on the Internet today that mortgage applications are down to a 27yr low. Last time applications were this low was 1996.
    Reminding me of 1981 -83 when I started out in the building industry. Homes were not as expensive then, and mortgages were 12% but still..
    Couple years on the job and buying my first house then things started slowing down. Company was great they didn’t lay anyone off permanently but we had to alternate weeks off.
    Expect to see things slowing down over the next several months. Then maybe interest rates falling. But then again every time is different

    1. Charles–my business is off 46% this year over last—which was down 25% from the year before. The good part is I don’t really care given my age. While mortgage applications may be down home equity loans are way up.

      1. That sounds great Tim ( not )
        Like I said before, this drama play sounds like a repeat. The last time in the economy I heard of people taking out equity loans it didn’t end well. Especially for small business. Too many of my customers in the building business were using equity loans for day to day operations. These types of loans the banks structured to be able to call with no notice and for no reason. Left a lot of contractors hurting with the double whammy of debt re-payment and slowing business.

        1. It’s an interesting point Charles.

          If free capital (covid $$) is being burned off and the next tranche being dug into is equity…yeh, not a good trend. But you can be sure Tim’s appraisals are more important than ever to lenders. They’re not going through 2010 again.

          1. Alpha, Tim’s neck of the woods has no comparison to the Bay Area.
            Not saying it could be happening again the same way. But a lot more room for Shenanigans that happened in 2007 to 2010 that left the teachers retirement fund and the pipe fitters union holding investments that had inflated values.

  5. Won’t open for me. Reminds me of when the Barrons had FNM on cover calling them TOAST. They were right. I should have listened!!

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