Renters are walking away or taking less space as leases come due. Average office rents have already dropped by 20pc. Yet two-thirds of the leases have not yet come up for renegotiation. The full exodus has yet to happen.
“We’re in the early innings. That’s the reality,” said Scott Rechler, head of real estate specialists RXR and a board member of the New York Fed.
US commercial real estate has $5.5 trillion (£4.5 trillion) of debts. The worst trouble is in office buildings, though prime assets in hot spots have avoided the broader bloodbath. Projects that made sense in the QE world of free money are no longer viable in the new world of 5pc bond yields.
“The entire commercial real estate space is going through this interest rate regime change. It all has to be reset,” said Mr Rechler, in a Goldman Sachs exchange.
“Lenders are starting to capitulate, realising that they need to mark down loans. This is going to pick up momentum as we go into 2024.
“Pain will be felt across the board. In the office space we’re already recapitalising loans at 50 cents on the dollar: the equity is wiped out and half of the loan wiped out,” he said.
Prof Van Nieuwerburgh said it is no longer possible to hide the scale of the problem. “$1 trillion of commercial property debt is coming due over the next year and a bit. The average fixed loan is 10 years so the debt maturing today was taken out in 2013 at around 3.5pc. It has to be refinanced at over 7.5pc,” he said.
If you can get a loan. Banks are being forced to slash exposure by shareholders, boards, and regulators. “They’re not actively lending any more. They’re only lending to their best customers,” said Mr Rechler.
The failure of Silicon Valley Bank (SVB) and two smaller lenders in March may only be the first phase of a long dragging crisis in the regional banking system. “I wouldn’t be surprised two years from now if there were 500 to 1000 fewer banks. I’m not saying they’ll go out of business, but there will be heavy consolidation,” he said.
The Fed has staunched the liquidity crisis since March with emergency lending but that buys only time. It does not tackle the deeper solvency crisis.
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A rising wave of property defaults threatens hundreds of US banks
Renters are walking away or taking less space as leases come due. Average office rents have already dropped by 20pc. Yet two-thirds of the leases have not yet come up for renegotiation. The full exodus has yet to happen.
“We’re in the early innings. That’s the reality,” said Scott Rechler, head of real estate specialists RXR and a board member of the New York Fed.
US commercial real estate has $5.5 trillion (£4.5 trillion) of debts. The worst trouble is in office buildings, though prime assets in hot spots have avoided the broader bloodbath. Projects that made sense in the QE world of free money are no longer viable in the new world of 5pc bond yields.
“The entire commercial real estate space is going through this interest rate regime change. It all has to be reset,” said Mr Rechler, in a Goldman Sachs exchange.
“Lenders are starting to capitulate, realising that they need to mark down loans. This is going to pick up momentum as we go into 2024.
“Pain will be felt across the board. In the office space we’re already recapitalising loans at 50 cents on the dollar: the equity is wiped out and half of the loan wiped out,” he said.
Prof Van Nieuwerburgh said it is no longer possible to hide the scale of the problem. “$1 trillion of commercial property debt is coming due over the next year and a bit. The average fixed loan is 10 years so the debt maturing today was taken out in 2013 at around 3.5pc. It has to be refinanced at over 7.5pc,” he said.
If you can get a loan. Banks are being forced to slash exposure by shareholders, boards, and regulators. “They’re not actively lending any more. They’re only lending to their best customers,” said Mr Rechler.
The failure of Silicon Valley Bank (SVB) and two smaller lenders in March may only be the first phase of a long dragging crisis in the regional banking system. “I wouldn’t be surprised two years from now if there were 500 to 1000 fewer banks. I’m not saying they’ll go out of business, but there will be heavy consolidation,” he said.
The Fed has staunched the liquidity crisis since March with emergency lending but that buys only time. It does not tackle the deeper solvency crisis.
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