CRE’s concerns intensify when the stimulus programs expire
Uncertainty about exposure to commercial real estate continues to haunt banks.
While many lenders have reported a steady decline in loan deferrals, industry watchers are worried about future demand for business and office space and what would happen if lawmakers did not approve more stimulus measures for existing tenants. And a certain number of CRE borrowers are prohibited from participating in federal pandemic initiatives like the main street loan program.
CRE’s overall default rate for banks rose to 0.92% on June 30 from 0.83% a quarter earlier and 0.68% at the end of last year, according to data from the Reserve federal. While well below levels seen during the financial crisis, it is the highest rate since the start of 2016, and some industry observers fear it will continue to climb in the coming quarters.
As stimulus programs expire, more tenants are likely to miss their rent payments, putting more pressure on commercial landlords trying to pay off their mortgages.
“What happens when all that stimulus goes away, when these postponement periods end? Said Jon Winick, CEO of Clark Street Capital. “I think we’re going to see a lot more challenges. The credit picture right now is a mirage.
“It’s sobering to think of what banks might look like without more stimulus,” said Matthew Anderson, CEO of Trepp.
And there are signs some borrowers are deliberately defaulting after realizing they won’t be able to extend or refinance their loans – a development that could accelerate a wave of foreclosures later this year.
Loans scheduled to mature in the next five quarters have significantly higher default rates than other loans, Trepp researchers said in a recent report. Within this group, default rates for loans with balances greater than $ 25 million are considerably higher than those for smaller loans.
“Larger borrowers are generally more sophisticated and less likely to be burdened with recourse or collateral, which makes strategic default a more rational decision,” Trepp researchers said.
High vacancy rates cripple many hotels and reduced foot traffic is hurting retailers in malls and malls. Office buildings are another potential source of weakness as more Americans work remotely and more employers consider reducing their physical space.
“These areas continue to be the most under pressure,” Anderson said. “The numbers are not as dramatic as feared, but due to the various stimuli, they are underestimated.”
Lawmakers are also affected.
At a House Financial Services Committee hearing on Tuesday, members urged Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin to allow CRE borrowers to access government assistance programs.
Deloitte has forecast that write-offs of loans guaranteed by office, commercial, industrial and hotel buildings could reach 0.47% of the outstanding balances of these loans. Although it is well below the 1.65% mark reached in 2010, it would mark an increase from only 0.05% before the pandemic.
As some markets and industries recovered over the summer, sectors that were struggling before the pandemic are facing increasingly significant challenges.
Deloitte noted in a recent report that 90% of newly struggling assets in the second quarter were related to the hospitality and retail industries. Retail developers face the additional challenge of changing consumer preference for digital commerce.
While a number of bankers have said that the overall economy appears to be slowly recovering and most borrowers are making loan repayments, many uncertainties remain.
“There are still a lot of unknowns,” said Brian Martin, analyst at Janney Montgomery Scott.
Deferral rates, although declining, remain historically high, averaging 7% of total loans to banks covered by Janney. The credit situation could deteriorate especially if a significant portion of these loans were to become delinquent, Martin said.
“We might not really know where things stand until Q4 or even next year,” Winick said. “But anyone who claims victory now, in terms of credit standing, would be very misleading.”