Next major asset classes to be written down at banks?--I suspect commercial real estate

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am starting to research how many commercial real estate loans are included in the assets of the banks I follow---particularly downtown office building loans. I would not doubt we will hear of banks taking big write downs on these loans as leases expire and tenants do not renew or demand much more lucrative leases.

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Yes, but presumably there was actual decent equity behind their loans. I don't think we should expect that many zeros, but could be wrong.

CRE is up next.

Class A is still good
Class B is ok if no capital improvements are needed. Beyond that, the CMBS cut off.

CMBS funding has fallen 72% in 12 months. $92 billion of office space financing is coming due this year - with no source of funding for refinance.

Yes, it will be trouble.

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CRE is up next.

Class A is still good
Class B is ok if no capital improvements are needed. Beyond that, the CMBS cut off.

CMBS funding has fallen 72% in 12 months. $92 billion of office space financing is coming due this year - with no source of funding for refinance.

Yes, it will be trouble.

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Could you please explain what these are. Also the price of real estate is still strong, why will they not just sell at a profit and recoup their investment if the market begins to turn?

And the banks are not going to refinance many of these deals that are up

Remember, many of the CRE assets were financed at the lowest rates ever in the history of the English speaking language. Someone has to pay

The regionals will take a bath, there will be many bankruptcies and people will swoop in to get good property at a decent deal

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Could you please explain what these are. Also the price of real estate is still strong, why will they not just sell at a profit and recoup their investment if the market begins to turn?

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Commercial mortgage backed securities (CMBS). Essentially bond holders that hold the debt (think mortgage MBS’s except shorter durations and on commercial properties).

Values are driven by the net operating income (noi) of a building and a cap rate. Higher the cap rate, lower the value and vice versa.

With NOI’s decreasing due to tenants moving out (revenue down) and cap rates going up, the values just won’t be there.

In the most simplistic terms:

Ie loan at origination had NOI of $1mm and a cap rate of 5%. Buildings value was $20mm

At renewal, building becomes 50% vacant, noi drops to $500k. Meanwhile cap rates move up to 6% value of the building is $8.3mm

This is an extreme case but could happen.

As someone mentioned though, 2008 taught a lot of lessons. Most commercial CRE isn’t leveraged to the hilt like before so equity will be wiped out but it won’t be a total shitshow.

I’m a lender/broker and we’re not seeing the cratering yet. There is still a ton of liquidity as well so some of these assets that are upside down will either trade at a large discount or the owner will be required to give up a large equity position in order to bring in someone to make a fresh equity injection.