All hopes that falling borrowing costs would mitigate the negative impact of the crisis on the US office market were dashed this week.
Deutsche Bank AG put more money aside for the maturity of US commercial real estate loans, while a Black Stone Mortgage Trust Inc. has cut its dividend. New York Community Bancorp’s shares then fell by the most since the last bout of turmoil in the commercial real estate sector in March after it reported loss provisions that were more than double what analysts on average had expected.
The announcements suggest that lenders may not be able to simply modify and extend loans in the hope that lower interest rates will ease borrowers’ pain and give property owners more time to Refinancing debtAccording to MSCI Real Assets, more than $94 billion worth of U.S. commercial real estate is currently distressed, with another $201 billion at risk of distress.
“If we are faced with $1.5 trillion in debt maturities over the next two years, the consequences will be severe,” said John Murray and François Trausch of Pacific Investment Management Co. wrote in a note this week. “Lenders and borrowers will be forced to bear the consequences: In the short term, we expect further declines in appraisals and price indices, which will make it even more difficult to rationalize loan extensions.”
The bad news started with Deutsche Bank saying the U.S. office sector will continue to weigh on profits in the coming months, even as it expects lower commercial real estate provisions in the second half of the year. Later that day, Blackstone Mortgage Trust Inc., a target of short sellers, reported a quarterly loss of $61 million, compared with a profit of $101.7 million in the same period last year. It cut its dividend by 24 percent.
The following day, New York Community Bancorp announced that it had set aside an additional $390 million in the second quarter to cover loan losses resulting primarily from office lending.
“Higher impairments suggest that asset revaluations may still be underway among lenders and others with real estate exposure,” said Tolu Alamutu, senior credit analyst at Bloomberg Intelligence, commenting on the outlook for the industry. “As transaction volumes increase, further adjustments cannot be ruled out. These levels may pale in comparison to last year, but could still have a lingering impact.”
Credit investors continue to expect that the turbulence in the commercial real estate sector will be limited. Risk premiums on bank bonds are rising less than the overall market, suggesting that they are outperforming.
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Private lenders see an opportunity to make profits as borrowers approach maturity. CRE loan funds are seeking to raise about $50 billion in capital in the near future, with some considering buying distressed loan portfolios from banks, according to analyst Green Street.
Katie Keenan, CEO of Blackstone Mortgage Trust, said in a statement: “With strong liquidity, accelerated repayments and an emerging investment pipeline, BXMT is well positioned to accretive capital in this environment and continue its uptrend through the cycle.”
Pimco’s Murray and Trausch wrote that there are opportunities for investors in both the senior and mezzanine spaces, but warned that the damage to commercial real estate will be permanent even if the Federal Reserve begins to ease monetary policy.
Forward curves suggest borrowing costs would keep commercial real estate values 20 to 40 percent below their 2021 peak, they said, adding: “The headwinds hitting the commercial real estate market will result in a much slower recovery than after the global financial crisis.”