Posts

Just How Big is the Wall of Maturities?

money_hundred dollar bills with magnifying glass_shutterstock_2241523095 800x315

According to Newmark, there is now a $2 trillion maturity wall of CRE loans facing banks over the next three years. A dizzying sum.

But the statement raises a question. When the size of the oncoming wall — or wave or lava flow, or whatever to call the coming flood — is mentioned, is anyone really sure of the size?

CRED iQ’s database at middle of December 2023 showed “approximately $210 billion in commercial mortgages that are scheduled to mature in 2024, with an additional $111 billion of CRE debt maturing in 2025. In total, CRED iQ has aggregated and organized a total of $320 billion of commercial mortgages slated to mature within the next 24 months.”

In February 2024, the Mortgage Bankers Association said that 20% of commercial and multifamily mortgage balances were to mature this year.

“Twenty percent ($929 billion) of the $4.7 trillion of outstanding commercial mortgages held by lenders and investors will mature in 2024, a 28 percent increase from the $729 billion that matured in 2023, according to the Mortgage Bankers Association’s 2023 Commercial Real Estate Survey of Loan Maturity Volumes,” they wrote.

Even discussions can be misleading. Take the Financial Times article. The headline is, “Banks face $2tn of maturing US property debt over next 3 years.” The immediate question becomes how much of banks’ portfolios are coming due? But to get there, it’s critical to see what the total holdings are.

According to the Federal Reserve’s “Assets and Liabilities of Commercial Banks in the United States,” also known as H.8, thetotal of commercial real estate loans, including multifamily, held by banks was $2,985.5 billion during the week of March 20, 2024. Given the timelines of loans, most frequently five-year cycles, a 20% turnover annually is a realistic estimate. But a $2 trillion count would be two-thirds of all bank loans, which doesn’t seem plausible.

GlobeSt.com contacted Newmark for some clarity. The firm responded with information from David Bitner, Newmark’s executive managing director and global head of research. Here are his points:

  • “The $2T figure should indeed refer to ALL CRE loans (including 5+ unit multifamily).”
  • “Bank maturities are the largest share of near-term maturities, which is a large part of why we focus on them.”
  • “Debt fund and CMBS/CRE CLO debt is also front-loaded.”
  • “Data comes from Mortgage Bankers Association latest Loan Maturities report (released in mid-February).”

So, the pool of loans is much larger than those held only by banks. Even with the “extend and pretend” treatment lenders seeking to keep losses off their balance sheets, eventually reality sets in. In one sense, it won’t matter who holds the loans. As accounting standards eventually force lenders to write off clear losses, the result would be a large exercise in mark-to-market, lowering the value of many if not all CRE loans.

That would hurt the total asset values of many banks, which is the condition that led to the closures of Silicon Valley Bank, First Republic Bank, and Signature Bank last year. As Gosin told the FT, such a result would force some banks “to liquidate their loans or find other ways to reduce their weight in real estate,” whether by finding ways to increase capital, offload the risk, or further reduce the amount of CRE lending they do.

 

Source:  GlobeSt.

/by

Bracing For The Commercial Real Estate ‘Reckoning’

future green road sign with dramatic clouds and sky_canstockphoto3157426 800x315
The first proper U.S. financial market tremors of 2024 have been felt and unsurprisingly, perhaps, commercial real estate is at the heart of the dislocation.
Unsurprising, at least, to the thousands who descended on Miami this week for the investor conferences and meetings collectively termed “Hedge Fund Week,” who put commercial real estate as perhaps the most scarlet of red flags for the year ahead.
Just as New York Community Bancorp shares were plunging nearly 40%, unleashing the biggest sell-off in regional U.S. bank stocks since the shock of March last year, some of the most powerful names in finance were sounding the warning.
“There’s going to be a reckoning. How contained that is is TBD (to be decided),” Drew McKnight, co-CEO at Fortress Investment Group, said on a panel at the iConnections Global Alts 2024 conference on Tuesday.
“Even in a benign environment, even in a soft landing … that is an area that will provide stress. I don’t think it will be a bloodbath … but there is turmoil, and the worst of that turmoil is yet to come,” he said.
McKnight was one of four on the “Wall Street Titans Panel” alongside Third Point’s Dan Loeb, Oaktree Capital Management’s Armen Panossian and Apollo’s John Zito. Hundreds of billions of dollars of assets under collective management, and a collective wariness towards commercial real estate (CRE).
To be sure, none called an immediate crisis or crash. And the Federal Reserve’s rapid and highly effective response to the regional banking shock last March shows that policymakers have the hoses to put out fires were they to appear again.
Instead, there could be a steady drip over the coming years of borrowers refinancing mortgages at significantly higher interest rates, buildings remaining empty, and asset values heading south.
“It’s not going to happen overnight, but I can see lots of situations where the debt comes due that it’s going to be very hard to warrant anywhere close to where these valuations are today,” warned Apollo’s Zito.

MATURITY WALL OF WORRY

According to Goldman Sachs, some $1.2 trillion of commercial mortgages are scheduled to mature this year and next. That’s almost a quarter of all outstanding commercial mortgages, and the highest recorded level going back to 2008. The biggest single holder are banks with a 40% share.
Other estimates put the “maturity wall” as high as $1.5 trillion.
Whatever the number, it is lot of borrowers having to refinance mortgages at two or even three times higher rates thanks to the 500 basis points of Fed rate hikes over 2022-23.
They won’t all be able to do that, putting lenders on the hook too. And small U.S. banks are on the hook more than most – Apollo’s chief economist Torsten Slok estimates almost 70% of all CRE loans outstanding is held by small banks.
Barry Sternlicht, CEO of Starwood Capital Group, an investment firm focusing on real estate with around $115 billion of assets under management, sounded an even gloomier note on the CRE sector and banks that lend to it.
“The office market has an existential crisis right now,” Sternlicht told the Global Alts conference. “It’s a $3 trillion asset class that is probably worth $1.8 trillion. There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is.”
Yet all that said, the Fed’s response to last year’s regional banking shock – namely the liquidity injection via the Bank Term Funding Program (BTFP) – and the subsequent rebound across financial markets are powerful reminders not to get too carried away.
The Fed has said the BTFP will be wound down in March, but few investors would bet against the central bank quickly reopening it or even creating new tools to provide liquidity or backstop the market should the need arise.

 

Source:  Reuters

/by