Commercial Real Estate, especially Office, remains a problem and a potential headwind for markets. Bank of America’s CEO Brian Moynihan called it a “slow burn.” As shown in the charts below, many metrics continue to worsen.
Source: Bespoke
In the lower left, you'll notice office vacancy rates continue to worsen and are approaching 30%. As shown in the upper left, office loan delinquency rates continue to rise. The Atlantic magazine recently pointed out that most office leases were signed before the Covid pandemic hit - when offices were full and interest rates low - and have yet to come up for renewal. An estimated $1.5 trillion in office loans are due for repayment by 2025. Some will be written off, some will be re-negotiated and extended. The exposure is greatest with regional banks as they account for nearly 70% of all commercial property bank loans.
While we continue to see the odds favoring a continuing bull market, the remaining “CON” of Commercial/Office property fallout is a risk we are monitoring from several angles to gauge if (and when) it may lead to broader financial contagion. Positively, we continue to see limited distress in a wide range of risk metrics we track (even after several publications re-iterated the worsening of the CRE problem earlier this week). A recent Barron’s article identified 10 regional banks that are most exposed to CRE. Should their CRE problems escalate, it would further weaken their balance sheets and require additional equity issuance or bailouts. Both would be negative developments for their stockholders and would start to show up in their share prices. So far, the majority of these 10 banks’ share prices are holding up (trading above their lows reached during last year’s regional banking crisis that took down Silicon Valley Bank, First Republic, and Signature Bank.
Sources: Barron’s, Bloomberg
Additionally, the recent breakdown of New York Community Bank (a regional bank with troubled CRE loans) and subsequent capital infusion by former US Treasury Secretary Steve Mnuchin and a group of private investors showed little fallout/share price declines from other high CRE-exposure regional banks. This suggests private market capital may be available if needed and that the market views the CRE problem as currently “containable” and unlikely to trigger another financial crisis.
For now, our indicators and risk metrics agree. We will continue to monitor the CRE/Office problem from numerous angles and adjust our strategies accordingly should it escalate to a level that has broader implications for financial markets.
*All data sourced from Bloomberg
