Banks are increasingly willing to adjust the terms of commercial real estate loans in the United States to avoid defaults, alleviating near-term losses but hiding mounting market stress in some areas.
As commercial real estate in the United States has deteriorated, with offices and retail suffering in some regions as more people work from home, investors are concerned that bank losses could total tens of billions of dollars.
According to commercial real estate (CRE) analysts and industry data, banks have increased their efforts to prevent such losses in recent weeks. According to the analysts, lenders are granting borrowers loan extensions and changes, selling derivatives to fix interest costs, and extending subsidized loans to investors to purchase failed debts.
Their objective is that the current phase of tiding will allow these properties to become profitable again and refinance in the future when interest rates fall, and data indicates that they are having some success.
Deutsche Bank’s global head of CRE capital markets, Shaishav Agarwal, stated that banks were proactively working with borrowers to assist avoid defaults.
“After all of that, if a borrower handed over the keys, banks might collaborate with equity partners who have property management expertise,” Agarwal noted.
Some analysts believe the technique, which is reminiscent of the “extend and pretend” strategy used during the 2008 financial crisis, would be put to the test if the sector’s stress worsens.
“The office sector is facing the most severe headwinds, even as some investors are re-entering the market for newer, higher-quality space,” said Steve Jellinek, DBRS’s head of commercial mortgage backed securities (CMBS) research.
According to him, CMBS special servicers, which handle distressed loans, had a total unpaid principal balance of $12.74 billion in office loans as of June, up from $5.51 billion the previous year.
More is almost certainly on the way. According to Trepp, around $20 billion in office CMBS loans will mature in 2023.
The commercial property sector’s health is critical to the overall economy. If large losses pile on banks’ books, it will suffocate credit and hinder growth.
According to the US Federal Reserve, the 23 major US banks controlled 20% of office and downtown retail CRE loans. Small banks have a large proportion of their assets invested in CRE loans.
In the Fed’s recent stress tests, the 23 large banks stood to lose $64.9 billion in a severely catastrophic scenario of CRE prices falling by 40%. According to Moody’s, office prices had declined 12.7% from their peak a year ago by the first quarter.