Here’s how bad commercial real estate pain can be for banks, other lenders


Horizon of New York City.

AFP / Getty Images

The record $ 5 trillion debt boom in US commercial real estate over the past decade could help lower rent properties collect, lower rates and receipt assumptions about how.

But as the COVID-19 epidemic threatens to rewrite many regulations where people work, shop, and spend their leisure time, the big question is: what does this mean for commercial real estate? Could?

A team of analysts led by S&P Global wrote, “Commercial real estate (CRE), in our view, topped the list of areas at risk of deterioration in the quality of those assets in the midst of the coronovirus epidemic, which the US Will cause losses for banks ”. Stuart Placer of ratings in a new report Monday.

While Pleasure’s team expected most banks to suffer an estimated 3% “base case” loss on their real estate without heavy risk, they also warned that the rate of loss could be 10% or more. , Which would mean a “much more significant” banking sector is likely to make a dent which will cause a decline for many banks. “

Here is his chart showing almost half of US commercial real estate loans to banks:

Who owns a $ 5 trillion CRE loan

S&P Global, Fed Data

For reference, the Federal Reserve said it expects to experience 6.3% average losses under its 2020 stress tests on all loans held by banks, including credit cards, auto loans and corporate credit, under a “severe adverse scenario” Will happen.

This would be equivalent to a combined $ 430 billion loss from a nine-quarter outlook, but the Fed also said that the loss could increase to 10.2% if the economic recovery ends.

S&P Global said, “If the rate of loss reached these levels, there is no doubt that the more risky small banks would suffer greatly.”

What’s more, S&P feels the pandemic may reopen parts of commercial real estate, with the Fed’s stress test not to be expected if companies adopt more “liberal work-at-home policies” , Which can cut down on office space demand.

See: The office sector is a ‘big question’ that this commercial real estate veteran says

And while it is known that retail and lodging have taken a beating, a complete picture of the economic toll of the worst public-health crisis in a century is far from known, especially since the COVID-19 cases in November set new records Has made it dangerous.

check out: not again! The economy is facing another stringent test with a record coronovirus surge

In the struggling mall sector, the Tubman Center TCO,
+ 8.40%
Over the weekend, Simon Property Group agreed to a lower price to merge with SPG,
+ 5.70%,
A heated legal battle can occur during the holidays.

related: Simon Property leaves four struggling malls. And why can follow

But analysts at BofA Global also reported that distressed sales accounted for only about 1% to 2% of total commercial real estate transactions completed in the second and third quarters.

BofA’s team wrote in a weekly report, “Unless there is a significant increase in distressed asset sales, we estimate that asset pricing metrics will remain relatively stable.”

Until then, it may make sense to see how the shares of Real-Estate Investment Trust (REIT) trade, according to the S&P manager.

“Remarkably, the share prices of publicly traded REITs are around 25% lower for most customers in the CRE sub-sector, indicating that investors believe some difficulties down the road in the CRE market Is likely to happen. “

When looking at the major exchange-traded funds in commercial real estate, the Vanguard Real Estate ETF VNQ,
+ 1.12%
Monday ended the year down 7%, or roughly as iShares US real estate ETF IYR,
+ 0.81%
According to FactSet data.

S&P 500 Index SPX,
+ 1.16%
And the Dow Jones Industrial Average DJIA,
+ 1.59%
The COVID-19 closed on Monday in a fresh record amid more promising developments on the vaccine front.

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