© Reuters. The Hudson River is seen from one of the top floors of the newly built 30 Park Place in the Tribeca neighborhood of New York January 21, 2015/File Photo
By Jamie McGeever
ORLANDO, Florida (Reuters) – The first proper U.S. financial market tremors of 2024 have been felt and unsurprisingly, perhaps, commercial real estate is at the heart of the dislocation.
Unsurprising, at least, to the thousands who descended on Miami this week for the investor conferences and meetings collectively termed “Hedge Fund Week,” who put commercial real estate as perhaps the most scarlet of red flags for the year ahead.
Just as New York Community Bancorp (NYSE:) shares were plunging nearly 40%, unleashing the biggest sell-off in regional U.S. bank stocks since the shock of March last year, some of the most powerful names in finance were sounding the warning.
“There’s going to be a reckoning. How contained that is is TBD (to be decided),” Drew McKnight, co-CEO at Fortress Investment Group, said on a panel at the iConnections Global Alts 2024 conference on Tuesday.
“Even in a benign environment, even in a soft landing … that is an area that will provide stress. I don’t think it will be a bloodbath … but there is turmoil, and the worst of that turmoil is yet to come,” he said.
McKnight was one of four on the “Wall Street Titans Panel” alongside Third Point’s Dan Loeb, Oaktree Capital Management’s Armen Panossian and Apollo’s John Zito. Hundreds of billions of dollars of assets under collective management, and a collective wariness towards commercial real estate (CRE).
To be sure, none called an immediate crisis or crash. And the Federal Reserve’s rapid and highly effective response to the regional banking shock last March shows that policymakers have the hoses to put out fires were they to appear again.
Instead, there could be a steady drip over the coming years of borrowers refinancing mortgages at significantly higher interest rates, buildings remaining empty, and asset values heading south.
“It’s not going to happen overnight, but I can see lots of situations where the debt comes due that it’s going to be very hard to warrant anywhere close to where these valuations are today,” warned Apollo’s Zito.
MATURITY WALL OF WORRY
According to Goldman Sachs, some $1.2 trillion of commercial mortgages are scheduled to mature this year and next. That’s almost a quarter of all outstanding commercial mortgages, and the highest recorded level going back to 2008. The biggest single holder are banks with a 40% share.
Other estimates put the “maturity wall” as high as $1.5 trillion.
Whatever the number, it is lot of borrowers having to refinance mortgages at two or even three times higher rates thanks to the 500 basis points of Fed rate hikes over 2022-23.
They won’t all be able to do that, putting lenders on the hook too. And small U.S. banks are on the hook more than most – Apollo’s chief economist Torsten Slok estimates almost 70% of all CRE loans outstanding is held by small banks.
Barry Sternlicht, CEO of Starwood Capital Group, an investment firm focusing on real estate with around $115 billion of assets under management, sounded an even gloomier note on the CRE sector and banks that lend to it.
“The office market has an existential crisis right now,” Sternlicht told the Global Alts conference. “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.”
Yet all that said, the Fed’s response to last year’s regional banking shock – namely the liquidity injection via the Bank Term Funding Program (BTFP) – and the subsequent rebound across financial markets are powerful reminders not to get too carried away.
The Fed has said the BTFP will be wound down in March, but few investors would bet against the central bank quickly reopening it or even creating new tools to provide liquidity or backstop the market should the need arise.
(The opinions expressed here are those of the author, a columnist for Reuters)
