US private lenders warn of a possible future commercial real estate crash
The FT's editor, Rula Khalaf, selects her favorite stories in the weekly Editor'\''s Digest.
Fund managers are warning of growing problems in the $5.6 trillion U.S. commercial real estate industry that could be painful for lenders already shaken by turbulence in the banking sector.
Rising interest rates, falling prices and a post-pandemic slump in demand for office space have crippled the commercial real estate market. But those problems have intensified with the failures this year of Silicon Valley Bank, Signature Bank and First Republic, raising concerns about other regional banks that make up the bulk of commercial real estate loans.
"The private market has not yet begun to significantly'''drive down real estate values,' Apollo Global Management president and co-president Scott Kleinman told the Financial Times. "The next one will be equity. It's the next profile in the US. Like everything else, it's been so tightly valued, and there hasn't been a crisis in the U.S. commercial real estate market since the '90s. "
Guggenheim Partners chief investment officer Anne Walsh said the pain will be concentrated in certain regions of the U.S., including major urban centers such as San Francisco and New York, as well as second-class office buildings in need of renovation. "We're probably heading into a recession in the real estate market, but not in the entire real estate market," Walsh said. "Lenders are going to be very picky about what loans they are willing to make." She noted,''s that some lenders are requiring personal guarantees from property owners - borrowers are securing their assets with mortgages, a signal that lending standards are tightening and that banks are pulling back. In a survey released by the Federal Reserve on Monday, most U.S. banks said they tightened lending standards for loans secured by nonresidential real estate in the first quarter, while none eased standards. There is also a huge amount of debt to be paid off in the coming years.
26 October
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"Commercial real estate is shoulder to shoulder ... If people are forced to move quickly''dissolve that leverage, it could arise elsewhere. "
For years, real estate developers have relied on cheap debt financing and invested in a market with rising asset prices. Now, said Mathieu Chabran, co-founder of alternative active manager Tikehau Capital, "we're seeing a perfect storm where rising interest rates are forcing assets to revalue downward, combined with a structural decline in occupancy and aging assets." Last month, Berkshire Hathaway vice president Charlie Munger warned of a storm brewing in the U.S. commercial real estate market, saying banks are "full" of "bad loans".
"A lot of real estate is not so good anymore," Munger said. "We have a lot of distressed''office buildings, a lot of distressed shopping centers, a lot of distressed other properties. There's a lot of suffering out there." Munger added that the problems are not as severe as they were in the 2008 financial crisis. At Berkshire's annual general meeting in Omaha on Saturday, Munger's partner Warren Buffett noted that lenders often end up with unwanted properties. "Banks tend to extend terms and pretend," he said. "Because of commercial real estate development, all kinds of activities are occurring, and on a large scale, but all of that has consequences, and we're starting to see the consequences for those who can borrow at 2.5 percent a year and find out that at current rates, nothing comes out. "
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