Commercial real estate trouble could trigger systemic credit crash, fund managers say

Fund managers are becoming increasingly concerned about this issue. commercial real estate The sector could trigger a credit crisis in the United States, according to new research from Bank of America.

Some 16% of participants in a global fund manager survey cited a “systemic credit event” as the biggest risk to markets in February, compared with just 11% the previous month. This has become the third biggest tail risk for markets, after persistent inflation and geopolitics.

Fund managers say the most likely source of credit events is the commercial real estate market.

Other possible sources include shadow banking, or unregulated non-bank financial institutions such as hedge funds, private equity funds, investment banks and mortgage lenders, as well as U.S. corporate bonds.

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“Wall Street” sign in New York City, January 27, 2023. (Photographer: John Taggart/Bloomberg via Getty Images/Getty Images)

Approximately $1.5 trillion in commercial mortgage debt is due by the end of 2025, but rising borrowing costs, tightening credit conditions and falling real estate values ​​due to remote work are increasing the risk of defaults. The risks are rising.

About $929 billion worth of commercial real estate loans are scheduled to mature this year, according to the Mortgage Bankers Association. Borrowers may have no choice but to refinance at a significantly higher interest rate or sell the property at a significant loss.

The US Federal Reserve (Fed) has raised interest rates to the highest level since 2001 in response to soaring inflation. Interest rates are expected to remain high for some time, as policymakers have indicated they are not prepared to start cutting rates until they are confident that inflation is back to 2%.

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Complicating matters is the fact that small and regional banks are the largest source of credit in the $20 trillion commercial real estate market, holding about 80% of the sector’s outstanding debt. be. Local banks were at the epicenter of turmoil within the financial sector last year following the failure of Silicon Valley Bank, and there are concerns that the turmoil could disrupt the financial industry. Loan standards become significantly stricter.

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When a credit crunch occurs, banks sharply raise their lending standards, making it difficult for businesses and households to obtain loans. Borrowers may be required to agree to more stringent terms, such as: high interest rate Because banks are trying to reduce their own financial risks.

Those concerns were reignited earlier this month when New York Community Bank cut its dividend and disclosed an unexpected quarterly loss on real estate loans tied to both office and apartment buildings. Since then, the company’s stock has lost about half its value.

Treasury Secretary Janet Yellen It has sought to downplay the growing distress within the commercial real estate sector and its potential impact on the banking system.

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Traders work on the floor of the New York Stock Exchange in New York City during morning trading on March 13, 2023. (Timothy A. Clary/AFP via Getty Images/Getty Images)

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Two weeks ago, when testifying before the Senate Finance Committee, Chair Yellen said that further bank stress and financial losses are expected as a result of weakness in the commercial real estate sector, but that it poses a “systemic risk to the banking system.” “I believe it will not happen.” While the exposure of the largest banks is very low, there may be smaller banks that will be stressed by these developments. ”



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