Fund managers are warning of mounting concerns in the US commercial real estate industry, which could prove challenging for lenders already grappling with the banking sector’s turmoil, according to a recent report by the Financial Times. The market has been under strain due to rising interest rates, falling prices, and diminishing demand for office space after the pandemic. However, the recent failures of banks, including Silicon Valley Bank, Signature Bank, and First Republic, have heightened these issues, particularly for regional banks that account for most of the commercial real estate loans.
Apollo Global Management’s co-president, Scott Kleinman, stated that the private market hasn’t yet started heavily marking down real estate. However, he warned that equity would be the first to suffer, marking the next potential challenge in the US. This situation has been exacerbated as commercial real estate has been priced tightly, and there hasn’t been a real estate crisis in the US since the ‘90s.
Guggenheim Partners’ chief investment officer, Anne Walsh, believes that the pain will primarily concentrate in some US regions, particularly large urban centers like San Francisco and New York. Second-class office buildings in need of repair will also suffer. She predicted a real estate recession, although not across the entire real estate market, with lenders becoming pickier about the loans they are willing to make.
To show the tightening lending standards and the fact that banks are pulling back, some lenders are requesting personal guarantees from property owners and for borrowers to pledge their assets to secure a mortgage, which signals the banks’ pullback. According to a Federal Reserve survey released on Monday, most US banks tightened credit standards for loans secured by non-residential properties in the first quarter, with none of them easing lending standards.
The commercial real estate market is facing a wall of debt due for repayment in the next few years. The chief executive of a large US bank quoted in the report said that a lot of this real estate’s maturity cliff is funded by regional banks. He noted that commercial real estate is leverage on leverage on leverage. Therefore, if people are forced to quickly unwind that leverage, it could pop up in other areas.
Real estate developers have traditionally relied on borrowing cheaply and investing in a market with rising asset prices. However, according to Mathieu Chabran, co-founder of $43 billion alternative asset manager Tikehau Capital, they now face a perfect storm of rising interest rates, which is forcing assets to reprice down, coupled with a structural decline in occupation rates and aging assets.
Berkshire Hathaway’s vice-chair, Charlie Munger, warned of a brewing storm in the US commercial property market, stating that banks were full of bad loans. He added that there were many troubled office buildings, shopping centers, and other properties, causing significant agony. Nevertheless, Munger emphasized that the situation wasn’t as severe as the 2008 financial crisis.
Warren Buffett, Munger’s partner, noted that lenders often ended up with unwanted property. He stated that banks tended to extend and pretend and that there were all sorts of activities that arise out of commercial real estate development that occur on a large scale. However, these activities have consequences, and the current situation is starting to show the consequences of people who could borrow at 2.5 percent, finding out it doesn’t work at current rates.
