Banks: Commercial real estate doom loop

Real-Estate Doom Loop Threatens America’s Banks

Regional banks’ exposure to commercial real estate is more substantial than it appears


By Shane Shifflett and Konrad Putzier, The Wall Street Journal, Sept. 6, 2023

Regional banks across the country gorged on commercial real-estate loans and related investments in big cities over the past decade.

With the commercial real-estate market now in meltdown, those trillions of dollars in loans and investments are a looming threat for the banking industry—and potentially the broader economy. Banks’ exposure is even bigger than commonly reported. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses…

Today’s troubled market, fueled by rising interest rates and high vacancies, follows years of boom times. Banks roughly doubled their lending to landlords from 2015 to 2022, to $2.2 trillion. Small and medium-size banks originated many of those loans, and all that lending helped push up property prices…

Direct plus indirect lending — along with foreclosed properties, trading portfolios and other assets linked to commercial properties — brings banks’ total exposure to commercial real estate to $3.6 trillion, according to a Wall Street Journal analysis. That’s equivalent to about 20% of their deposits…

The doom-loop scenario is starting to play out in big cities where office vacancies have soared. Real-estate investors that are unable to refinance their debt, or can only do it at high rates, are defaulting. The lenders, no longer getting the debt payments, often have to write down the value of those mortgages. Sometimes the bank ends up owning the property…[end quote]

The problems in CRE have been building for many months. Nearly $900 billion in commercial property loans are maturing this year and next, forcing many landlords to seek out more expensive financing from private investors and banks still willing to lend.

More small and medium size regional banks could fail in the years ahead. Many of these banks are the only source of commercial loans for small and medium sized businesses in their towns across the U.S.

Bank failures could undermine the economy in these towns. This is not a black swan but a potentially serious recessionary problem that is building.

Wendy

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A lot of the loans are securitized.

2 things:

  1. We have too many banks in this country. With modern tech, tools, communication and efficiency, transactions of all types can be made from practically anywhere. All of those small town, mid sized banks will be cutting jobs. Those with skills will be able to join the tele - support model that now drives medical, travel, BANKING, and other business functions.

  2. Much of the CRE meltdown is an opportunity for PE and other financiers. Yes, the terms will be egregiously high and valuations will be appropriately under market value, however, developer teams will still manage to get a small cut of profit while they continue operating and delivering CRE to market. Equity investors will be wiped out and bond holders will get capital calls or modest returns of capital.

The conversion from office to dense, multi-unit residential has been a thing for many years. I expect it will be even more prevalent as CRE is redeveloped.

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Nah. What we have is too many “bank-like things” without regulation. Dark money (and I don’t mean that in a nefarious way) is a bad thing simply because it is doomed to make many of the same mistakes as hobbled the banking industry over the centuries (panics, runs, scams) but without protections for the participants. As long as those are the ultra-wealthy and they don’t mind swimming naked it’s OK with me, but the downstream effects, as we saw in 2008 (and as we may be seeing a version of in China) can be devastating for an economy, and occasionally the world.

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