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Tag: commercialrealestate

  • Oaktree Capital calls commercial real estate ‘most acute area of risk’ right now

    Oaktree Capital calls commercial real estate ‘most acute area of risk’ right now

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    Distressed-debt giant Oaktree Capital sees big opportunities in credit unfolding over the next few years as a wall of debt comes due.

    Oaktree’s incoming co-chief executives Armen Panossian, head of performing credit, and Bob O’Leary, portfolio manager for global opportunities, see a roughly $13 trillion market that will be ripe for the picking.

    Within that realm is high-yield bonds, BBB-rated bonds, leveraged loans and private credit — four areas of the market that have only mushroomed from their nearly $3 trillion size right before the 2007-2008 global financial crisis.

    “Clearly, the most acute area of risk right now is commercial real estate,” the co-CEOs said in a Wednesday client note. “That’s because the maturity wall is already upon us and it’s not going to abate for several years.”

    More than $1 trillion of commercial real-estate loans are set to come due in 2024 and 2025, according to the Mortgage Bankers Association.

    A retreat in the benchmark 10-year Treasury yield
    BX:TMUBMUSD10Y,
    to about 4.1% on Wednesday from a 5% peak in October, has provided some relief even though many borrowers likely will still struggle to refinance.

    Related: Commercial real estate a top threat to financial system in 2024, U.S. regulators say

    “There’s a need for capital, especially for office properties where there are vacancies, rental growth hasn’t materialized, or the rate of borrowing has gone up materially over the last three years. This capital may or may not be readily available, and for certain types of office properties, it absolutely isn’t available,” the Oaktree team said.

    With that backdrop, the firm expects to dust off its playbook from the financial crisis and acquire portfolios of commercial real-estate loans from banks, but also plans to participate in “credit-risk transfer” deals that help lenders reduce exposure.

    Oaktree also sees opportunities brewing in private credit, as well as in high-yield and leveraged loans, where “several hundred” of the estimated 1,500 companies that have issued such debt are likely “to be just fine” even if defaults rise, they said.

    Another area to watch will be the roughly $26 trillion Treasury market, where Oaktree has some concerns “about where the 10-year Treasury yield goes from here” — given not only the U.S. budget deficit and the deluge of supply that investors face, but also how foreign buyers, once the “largest owners in prior years, may be tapped out.”

    Related: Here are two reasons why the 10-year Treasury yield is back above 4%

    U.S. stocks
    SPX

    DJIA

    COMP
    fell Wednesday after strong retail-sales data for December pointed to a resilient U.S. economy, despite the Federal Reserve having kept its policy rate at a 22-year high since July.

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  • ‘Banks fail. It’s OK,’ says former FDIC chair Sheila Bair.

    ‘Banks fail. It’s OK,’ says former FDIC chair Sheila Bair.

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    Higher interest rates may be painful in the short term, but banks, savers and the financial ecosystem will be better off in the long run, said Sheila Bair, former chair of the Federal Deposit Insurance Corp.

    “When money is free, you squander it,” Bair said in an interview with MarketWatch. “It’s like anything. If it doesn’t cost you anything, you’re going to value it less. And we’ve had free money for quite some time now.”

    Bair, who led the FDIC from 2006 to 2011, caused a stir recently in criticizing “moonshots,” the crypto industry and “useless innovations” like Bored Ape NFTs, which proliferated because of speculation and near-zero interest rates.

    Her main message has been that the path to higher rates, while potentially “tricky,” ultimately will lead to a more stable financial system, where “truly promising innovations will attract capital” and where savers can actually save.

    Former FDIC Chair Sheila Bair was dubbed “the little guy’s protector in chief” by Time Magazine in the wake of the subprime mortgage crisis.

    Bair sat down for an interview with Barron’s Live, MarketWatch edition, to talk about the ripple effects of higher rates, what could trigger another financial crisis and why more regional banks sitting on unrealized losses could fail in the wake of Silicon Valley Bank’s collapse in March.

    “We probably will have more bank failures,” Bair said. “But you know what? Banks fail. It’s OK. The system goes on. It’s important for people to understand that households stay below the insured deposit caps.”

    The FDIC insures bank deposits up to $250,000 per account. It also has overseen 565 bank failures since 2001.

    “I know borrowing costs are going up, but your rewards for saving it are going up too,” she said. “I think that’s a very good thing.”

    However, Bair isn’t focused only on money traps and pitfalls for grown-ups. She also has two new picture books coming out that aim to explain big financial themes to young readers, including where easy-money ways, speculation and inflation come from.

    “One thing that I’ve learned from the kids is to not ask them what a loan is, because when I did that, a little hand when up, and she said: ‘That’s when you’re by yourself,’” Bair said.

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  • Why the Fed’s next decisions on rates could lead to a wave of commercial-debt defaults

    Why the Fed’s next decisions on rates could lead to a wave of commercial-debt defaults

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    Getting staff back to the office is only part of the battle.

    Regional banks that went big lending on office properties also face a ticking time bomb of maturing debt that they helped create, particularly if the Federal Reserve holds its policy rate near the current 22-year high well into next year.

    “The area of greatest concerns for banks is office space,” says Tom Collins, senior partner focused on regional banks and credit unions at consulting firm firm West Monroe. Should rates stay high, “borrowers are going to face a tough decision of whether they refinance or default,” he said.

    The fight to bring more staff back to half-empty office buildings comes as an estimated $1 trillion wall of commercial real-estate loans is set to mature through 2024. While tenants haven’t shied away from signing up to pay top rents at trophy buildings, the same can’t be said for the rows of lower-rung properties lining financial districts in big cities.

    See: Labor Day is just a ‘milestone’ in the marathon to get workers back to the office

    The Fed embarks on a two-day policy meeting on Tuesday, with expectations running high for rates to stay steady, giving more time to study the impact of earlier rate increases.

    The central bank’s rate hikes have further complicated matters for landlords, and fresh debt for office buildings no longer looks cheap nor abundant. Regional banks also have been piling back on lending after Silicon Valley Bank and Signature Bank collapsed in March and as deposits fled for yield elsewhere.

    Related: FDIC kicks off $33 billion sale of seized assets from Signature Bank

    Loan volumes from Wall Street similarly have been anemic. This year it has produced slightly more than $10 billion in “conduit,” or multi-borrower, commercial mortgage-backed securities deals through the end of August, the least since 2008, according to Goldman Sachs. Coupons, a proxy for mortgage rates, have climbed above 7%, the highest since the early 2000s.

    “I don’t think this is a wash out here,” Collins said of the threat of more regional bank failures, but he does anticipate pain for lenders heavily exposed to lower quality class B and C office buildings in urban areas.

    Banks can help mitigate the wall of debt coming due by stepping up the pace of loan modifications to help borrowers keep properties, but Collins said he also anticipates lenders will need to increase loan sales, write downs and mergers or acquisitions.

    “There is no doubt there will be private equity and other investors that will be interested in buying some of these loans, taking them off the balance sheets of banks,” Collins said.

    “The obvious question there is at what discount?” he said, adding, “I think investors will wait until things get more dire to try to get a better deal.”

    Another offset to banks’ office exposure has been the relatively stable performance of hotels, industrial and other property types. But Collins said that if rates stay high and the economy falters, those sectors are likely to face challenges as well.

    The 10-year Treasury yield,
    BX:TMUBMUSD10Y
    a benchmark lending rate for the commercial real estate industry, was near 4.32% on Monday, hovering around a 16-year high ahead of the Fed meeting, while the policy-sensitive 2-year Treasury rate
    BX:TMUBMUSD02Y
    was near 5.06%. Stocks
    SPX

    DJIA
    were edging higher.

    Office distress intensified in August, with the special servicing rate of loans in bond deals hitting 7.72%, compared with a 6.67% rate for all property types, according to Trepp, which tracks the commercial mortgage-backed securities market. A year ago, the rate of problem office loans was 3.18%.

    “If I was an investor, I would be patient around this, because values are only going to come down, I would imagine,” Collins said.

    Check out: Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

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  • Problem office loans are piling up in Chicago and Houston, but not yet in San Francisco

    Problem office loans are piling up in Chicago and Houston, but not yet in San Francisco

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    Key-card swipes don’t tell the whole story.

    Chicago, Philadelphia and Houston have some of the highest percentages of problem office loans when looking at delinquency rates and other early warnings signs of trouble, according to a new report by Barclays.

    That might come as a surprise, given that San Francisco has been making headlines for its broader commercial real estate woes, technology sector layoffs and struggles getting workers back to the office.

    But so far, it’s other cities like Philadelphia with a 14% rate of office loans at least 30 days delinquent (see chart), or Chicago where 21.2% of its office loans facing imminent default, triggering a transfer of their debt to a “special” loan servicer (Sp. Srv).

    Chicago, Houston and Philadelphia are top cities for trouble office loans


    Trepp, Barclays Research

    Researchers at Barclays based their findings on the performance of commercial property debt in metro areas with at least $2 billion of loans that were packaged into bond deals. They found that, “although there has been much discussion linking issues in the office sector with the very slow pace of return-to-office policies, we see very little correlation between performance of office collateral within various MSAs and Kastle’s weekly occupancy report.”

    Kastle’s most recent Back to Work Barometer showed Houston with a 61.6% rate of physical occupancy, above the 50% 10-city average. San Jose’s rate was pegged at below 39%, while the San Francisco metro area was near 45%, when looking at card swipes at more than 2,000 office buildings in 138 cities.

    But San Jose and Seattle were outperforming, both with no office loan delinquencies, few specially serviced loans or those on a watchlist for potential problems, according to Barclays.

    “Given that tech companies have pulled back from office occupancy and many have embraced remote work, we believe that office delinquencies will continue to rise,” wrote Lea Overby’s credit research team at Barclays, in a Tuesday client note.

    While Wall Street’s bond machine, known as the “commercial mortgage-backed securities (CMBS)” market, isn’t the biggest lender on U.S. office buildings, it’s the most transparent place to track loan performance in commercial real estate, because of its monthly public reporting requirements.

    Another caveat to the findings is that physical occupancy rates aren’t the same as in-place leases, which many companies continued to pay each month throughout the pandemic. Physical occupancy rates, however, can be a sign of tenant demand for future space.

    Higher interest rates, a mountain of maturing property debt and wobbling building prices have been pressuring landlords, with both Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen recently saying they continue to monitor the sector closely.

    Stocks were lower Tuesday, as investors awaited Chair Powell’s two days of testimony to Congress, with the Dow Jones Industrial Average
    DJIA,
    -0.72%
    off 200 points, or 0.6%, the S&P 500 index
    SPX,
    -0.47%
    off 0.4% and the Nasdaq Composite Index
    COMP,
    -0.16%
    0.2% lower, according to FactSet.

    Related: Blackstone wrote down its stake in this Chicago office building to $0. Now it’s talking with lenders on the debt coming due

    The S&P 500 Office REITs Sub-Industry Index
    SP500.40402040,
    -3.43%
    was down 1.1% Tuesday, but off 21% on the year so far, according to FactSet.

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