Subscribe to receive free Property sector updates! Be the first to know about the latest news in the Property sector with our daily email digest. Now, let’s dive into some interesting charts:
For lenders in the US commercial real estate markets, these charts are quite fascinating. The left figure represents the rising costs of secured debt for CRE borrowers, reaching a 20-year high. Specifically, it reflects the average interest rates of newly issued bonds backed by commercial mortgages. Even lower investment-grade tranches of CMBS exhibit unusually high interest rates. In fact, spreads over risk-free benchmark yields for BBB- tranches are significantly higher than spreads on the entire high-yield corporate bond market, as shown in the chart on the right.
Goldman Sachs’ strategists offer some perspective, noting that the situation could actually be worse. They base this on recent quarterly reports from banks, where some express optimism for the multifamily sector and class A office properties located outside of urban centers. And it seems that these positive surprises have positively impacted the performance of CRE-exposed equities in the past two months.
Overall, this signals that our view remains intact. While bank lending standards for office properties may remain tight until the sector’s valuations fully adjust, the risk of a systemic shock is quite low. This is due to stable capital positions and still healthy fundamentals in other parts of the CRE complex.
However, let’s not oversimplify the comparison of all financial risks against the possibility of a “systemic shock.” There are various challenges that office-property owners, regional banks, and other types of lenders and borrowers can face without it leading to a crisis among the global systemically important banks. Regulators have prioritized preventing such crises for over a decade.
When Goldman Sachs’ strategists highlight solid loan performance at Bank of America and JPMorgan as a reason for confidence in CRE markets, it appears somewhat peculiar. Looking at the chart below, most of the names listed, excluding PNC Financial, cannot be classified as regional banks. In fact, some are so large that they almost merit their own distinct category. Additionally, it is acknowledged that lending standards have tightened. The strategists choose to take an optimistic stance, emphasizing that the largest contraction in credit has occurred in construction loans. However, it is noticeable that standards in other markets have tightened in a similar fashion, if not to the same extent. It is also concerning to observe the increase in delinquent loans and those in special servicing.
But who knows? Everything could be fine. It’s probably, possibly, maybe not a systemic risk after all. Subscribe now to stay updated on the Property sector and continue to monitor these developments.
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