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The Mortgage Bankers Association has revised upward its estimate of debt maturing in 2024.

Because of the number of extensions and modifications that lenders have been granting borrowers in the past few years, the amount of CRE mortgages maturing this year is expected to increase from $659 billion to $929 billion.

“The lack of transactions and other activity last year, coupled with built-in extension options and lender and servicer flexibility, has meant that many loans that were set to mature in 2023 have been extended or otherwise modified and will now mature in 2024, 2026, 2028 or in other coming years,” said Jamie Woodwell, head of commercial real estate research at MBA.

This new estimate expands the universe of potential distress that could enter the market. At the same time, though, the increase in maturities this year could also have the unexpected consequence of generating more price transparency in the market. The uncertainty surrounding interest rates and questions about property values and fundamentals have led to fewer sales and financing transactions. However, the mortgages due to mature in 2024 and clarifications in other areas should help break up congestions in the markets.

The CRE loans maturing this year vary both by investor type and property type. For instance, just $28 billion, or 3 percent, of the outstanding balance of multifamily and healthcare mortgages either held or guaranteed by Fannie Mae, Freddie Mac, FHA, and Ginnie Mae will mature in 2024. In addition, life insurance companies will see $59 billion, 8 percent, of their outstanding mortgage balances mature in 2024. However, $441 billion, or 25 percent, of the outstanding balance of mortgages held by depositories; $234 billion, 31 percent, in CMBS, CLOs, or other ABS; and $168 billion, 36 percent, of the mortgages held by credit companies, in warehouse, or by other lenders, will mature this year.

In terms of property type, 12 percent of mortgages backed by multifamily properties will mature in 2024. Also, 17 percent of mortgages backed by retail and 18 percent backed by healthcare properties will mature this year. In addition, 25 percent of loans backed by office properties will come due in 2024. Finally, 27 percent of industrial loans and 38 percent of hotel/motel loans will mature this year, as well.

 

Source:  GlobeSt.

 

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The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) regularly checks with banks to better understand their lending landscape. The short take for commercial real estate from the most recent survey is that even tighter underwriting standards can be expected in the future.

And while easing interest rates are eventually expected to support relatively low demand from borrowers, that is unlikely to happen until May or June.

“Over the fourth quarter, significant net shares of banks reported tightening standards for all types of CRE loans,” the report noted. “Such tightening was more widely reported by other banks [or those with less than $50 billion in assets] than by large banks.” Tightening standards particularly by the “other banks” category were also true for multifamily loans.

 

“Major net shares of banks reported weaker demand for loans secured by nonfarm nonresidential and multifamily residential properties, and a significant net share of banks reported weaker demand for construction and land development loans,” they added. “Similarly, significant net shares of foreign banks reported tighter standards and weaker demand for CRE loans over the fourth quarter.”

The net percent of respondents that are tightening standards for CRE loans is a little shy of the 2020 pandemic peak and still near the 2009 apex of the Global Financial Crisis. Also, the net percent of domestic respondents reporting stronger demand for CRE loans is even worse than the depths after the GFC.

Dave Sloan, a senior economist at Continuum Economics, told Reuters that the results are “unlikely to generate any urgency for easing.” Banks expect demand for loans to increase as interest rates fall, but with signaling from the Fed, this is unlikely to happen until May or June at the earliest.

“The most frequently cited reasons for expecting to tighten lending standards over 2024, reported by major net shares of banks, included an expected deterioration in collateral values, a less favorable economic outlook, an expected deterioration in credit quality of the bank’s loan portfolio, an expected reduction in risk tolerance, an expected deterioration in the bank’s liquidity position, and increased concerns about funding costs and about the effects of legislative or regulatory changes,” explained the Fed.

More colloquially, at issue is fear on the part of banks, still around since the closuresof Signature Bank, Silicon Valley Bank, and First Republic Bank in the early part of 2023. Roughly a week after shares of New York City Bancorp — which bought most of the assets of Signature, including its CRE loan portfolio — started plummeting, they’re still in freefall. Shares went from about $10.30 or so to $4.20 at the close of Feb. 6, a drop of almost 60%.

The problems facing New York Community were more than Signature. A New York co-op loan that wasn’t in default nevertheless is now up from sale because of “a unique feature that pre-funded capital expenditures.” There was also an “additional charge-off on an office loan that went non-accrual during the third quarter, based on an updated valuation.” But they were all related to commercial real estate. And what rattles one bank rattles many more.

 

Source:  GlobeSt.

 

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Commercial real estate got some indirect bad news.

The Securities and Exchange Commission sent letter exchanges to several community or regional banks about potential exposure to CRE loans, as the Wall Street Journal reported.

The agency contacted Alerus Financial and the holding companies behind Mid Penn Bank, Ohio Valley Bank and MainStreet Bank. The letters were “to request more clarity in their disclosures around the potential consequences from the failures of First Republic Bank, Silicon Valley Bank and Signature Bank.”

The three banks were closed and put into receivership by the Federal Deposit Insurance Corporation. Certain long-term bond assets that the banks held lost a lot of value as the Federal Reserve drove interest up in an attempt to curb inflation. When interest rates rise, bond values at previous lower interest rates lose value. These bonds were classified by the banks as held-to-maturity, meaning they could be treated as keeping their face value. But concerned depositors pulled large amounts of money out of the banks. That forced the institutions to sell bonds, which then were marked to market, losing liquidity and pushing the banks toward insolvency.

CRE loans aren’t the same as bonds, but there are two ways they could lose value. One is that increased interest rates could put borrowers with loans coming to maturity into a position where they can’t get refinancing. The lending bank would at least have to modify the loan, which could affect depositor trust and willingness to leave their deposits in place. Or the borrower could outright default.

The other way they could suddenly lose value is if the valuation of the property dropped — something happening broadly across all asset types, as GlobeSt.com has reported. That could leave the loan underwater, increasing risk and leaving depositors concerned and, again, possibly pulling out money and threatening the bank’s liquidity and potentially solvency.

Small, mid-size, and regional banks were the originators of many of the existing CRE loans. Unlike consumer mortgages, the banks don’t sell off the loans, leaving them holding all the risk.

“The SEC is worried that some of the banks may not be disclosing as much of their risk or exposure as they should to their investors,” Kenneth Chin, a partner at law firm Kramer Levin Naftalis & Frankel, told the Journal.

The SEC asked the banks to provide a more specific breakdown of CRE loan portfolios by property type, geography, and other factors.

Although the SEC has only made direct requests of these banks, the thousands of other institutions could see this as a pressure they too could face. Banks might further restrict their lending activity in 2024, increasing scrutiny and tightening underwriting standards, like loan-to-value ratios, even more than has previously happened.

 

Source:  GlobeSt.

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In its 2023 annual report, the Financial Stability Oversight Council — a legacy of the Dodd-Frank Act that includes a broad array of federal banking regulators and others — pointed to multiple financial risks for the U.S. First on the list, commercial real estate.

At the top of the CRE section, $6 trillion in loans as of 2023 Q2, with half sitting on the balance sheets of banks, because these don’t get sold off to government agencies the way residential mortgages do. CRE loans are also the largest loan category for almost a half of all U.S. banks.

The concentration makes for a systemic weakness, especially as “the CRE market faced a rise in vacancy rates and declines in value for some property types, elevated interest rates, heightened CRE loan maturities, inflation in property operating costs, and an increase in CRE loan delinquencies.”

None of this should be a surprise to anyone who has been monitoring the market.

The agency’s concern is the one many in CRE have expressed.

“High interest rates increase refinancing costs for borrowers and can lead to decreasing property values across CRE sectors,” the report said. “If the decline in property value is significant relative to the time of financing, then the borrower may not be qualified to refinance the loan at maturity without an additional injection of equity. Thus, the loan may need to be restructured or entered into default, causing losses for the lender. As losses from a CRE loan portfolio accumulate, they can spill over into the broader financial system.”

That can cause banks to dump loans and properties, driving down values further and creating a vicious circle and also tightening credit availability. There are already signs of loan distress, with the delinquency rate for banks up 0.74 percent in the second quarter of 2022. CMBS delinquencies are also up.

Another concern is that bank stress could spread through interlinkages among banks, insurance companies, REITs, and private lenders.

The FSOC has some recommendations, that “supervisors, financial institutions, and investors continue to closely monitor CRE exposures and concentrations, and to track market conditions.”

The suggestions include ongoing evaluation of loan portfolios’ “resilience to potential stress, ensure adequate credit loss allowances, assess CRE underwriting standards, and review contingency planning for a possibly protracted period of rising loan delinquencies.”

 

Source:  GlobeSt.