February 2, 2024 | Thoughts From The Front Line of Commercial Real Estate

As Meta and Amazon further fan animal spirits in the tech sector, the melt in commercial real estate is spreading through the economy and financial system. US regional banks are -54% since January 2022, and the contagion is international, see Commercial Property Losses Hammer Banks on Three Continents:

Investors have wondered when the pain from the downturn in commercial property would hit banks. The past 24 hours showed it is happening right now, with lenders on three continents disclosing damage and two bank leaders resigning.

Also, see Bank Losses Revive Fears Over US Commercial Property Market:

Worries about regional banks also sparked a rally in Treasury bonds, a haven bet that typically benefits during moments of market turmoil. The yield on the 10-year note fell to 3.82 percent, its lowest level in a month, as traders fretted about how possible constraints on lending may affect US growth. “The rally in bonds today certainly has to do with fears about regional banks,” said Thierry Wizman, financial market economist at Macquarie.

Wizman also noted the bond rally may be related to expectations of a response from the Federal Reserve. “The Fed, when confronted with bank balance sheet problems, tends to create liquidity programmes. Those programmes tend to put a bid under bonds, because they favour the use of bonds as collateral against the Fed’s credit,” he said.

A wall of debt renewals is now hitting monthly. Fewer lenders can be found, but for those still offering credit, the average high-yield borrower is facing rates above 9% compared with current rates of less than 6%. Higher-grade borrowers are looking at rates closer to 6% compared with current rates of less than 4%.

Starwood Capital CEO Barry Sternlicht explained math on the ground this week.

Barry Sternlicht, Chairman & CEO, Starwood Capital Group. Here is a direct video link. 

Danielle Park February 2nd, 2024

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