Bank Crisis Adds a Fresh Crack in Property’s Foundations
Bank Crisis – The relationship between banking and real estate may be about to take a toxic turn.
The collapse of Silicon Valley Bank and Signature Bank will likely ripple through the mortgage market to commercial landlords. Signature Bank was one of the top commercial real estate lenders in the U.S., especially in New York, where it had a 12% market share, according to Matthew Anderson, managing director at Trepp.
Alternative lenders, such as specialist real-estate debt funds, may step in to fill the hole, but they charge higher interest rates. Banks are also likely to ask more for loans as they compete for a dwindling pot of U.S. deposits. One way or another, the cost of borrowing will rise, said Jim Stanley of WSJ Print Edition.
Commercial property values were already under pressure from rising interest rates. More expensive debt means potential buyers can’t make an acceptable return on their investment except by paying lower prices for buildings. According to an index of U.S. commercial property prices compiled by real-estate research firm Green Street, average prices have dropped 15% from peaks last March. Offices have been particularly hard hit, with falls of 25% over the period.
Stricter lending to real estate could in turn, come back to haunt banks. For now, the existing property loans on bank balance sheets look surprisingly healthy, considering how disruptive the past few years have been for landlords. The delinquency rate on loans secured by real estate at commercial U.S. banks was 1.21% in the fourth quarter of last year, according to data from the Federal Reserve Bank of St. Louis. That number peaked at around 10% in early 2010 and has been falling ever since.
Delinquency rate on loans secured by real estate, all commercial banks
Bank Crisis – As property values fall and landlords’ equity dwindles, borrowers have less incentive to make debt repayments. Big office owners, including Pimco’s Columbia Property Trust and a subsidiary of Brookfield Asset Management, have already defaulted on some mortgages. This trend will likely pick up as loans mature and must be refinanced at higher rates.
A new credit crunch shouldn’t be as severe as the 2008 financial crisis. Banks are better capitalized and have reduced their share of real-estate debt, and loan-to-value ratios are more conservative. Only 4% of larger banks—those with more than $50 billion in total assets—have exposure to real-estate loans above what regulators recommend, compared with 15% back in 2008. Smaller players with total assets of $1 billion to $10 billion look riskier: 29% have more real-estate exposure than deemed healthy by authorities.
Landlords who loaded up on cheap debt in recent years were feeling the pinch even before vulnerabilities in the U.S. banking system came to light last week. Just how tough conditions now become depends in large part on the U.S. Federal Reserve’s response to the current turmoil. If it hits the brake on interest-rate increases, it would be a powerful countervailing force.