Asset management giant Pacific Investment Management Corporation (PIMCO) recently predicts that more regional banks in the United States will go bankrupt due to the concentration of commercial real estate loans on their books.
John Murray, Managing Director of PIMCO's Global Private Commercial Real Estate Team, told the media that as lenders in the commercial real estate (CRE) sector, regional banks in the United States are just beginning to face a "real wave of difficulties.". CRE refers to non residential real estate, including various commercial properties such as office buildings, shopping centers, hotels, etc.
Murray explained that the uncertainty surrounding the Federal Reserve's interest rate cut has exacerbated the challenges faced by the CRE industry, with high borrowing costs driving down valuations and triggering defaults, resulting in regional banks as lenders being trapped in difficult to sell assets. He said that large banks have been selling high-quality assets to prevent further losses.
He added that in the past 18 months, his team has been scrambling to purchase some CRE loans sold by major US banks. "However, as non-performing loans increase due to maturity, we expect banks to sell these more challenging loans to reduce their exposure to troubled loans."
Regional banks are particularly sensitive to this turbulence. Earlier this year, New York Community Bank (NYCB) was exposed seeking external capital to support its balance sheet, leading to a significant crisis related to commercial real estate. The incident ended with external investors injecting over $1 billion.
For banks, a decrease in the value of collateral assets may lead to an increase in the loan to value ratio, which is the ratio of loan amount to actual collateral value. In extreme cases, the loan amount may even exceed the market value of the mortgaged real estate, putting pressure on the bank's asset structure.
In March of this year, MSCI Real Assets reported that regional banks were the only banks in recent years that did not require commercial real estate borrowers to pay additional down payments, highlighting their vulnerability in the face of declining asset valuations. Last week, Axos Financial Inc. was successfully targeted by short selling firm Hindenburg Research for this reason.
The MSCI Real Assets report predicts that banks will face approximately $441 billion in maturing real estate debt this year. Murray stated that CRE loans from larger banks have been restricted since the 2008 crisis and are unlikely to experience systemic bankruptcy due to real estate risk exposure.
At the same time, many mortgage real estate investment trusts have gradually been marginalized due to their own problems, limiting their ability to underwrite new investments. Starwood Real Estate Income Trust tightened restrictions on shareholder divestment last month to maintain liquidity and avoid selling assets, and there has been an increase in divestment requests for Blackstone's $59 billion property trust fund.
Murray stated that the loan volume of major public mortgage real estate investment trusts has decreased by 70% compared to the level in 2021. "From the perspective of capital markets and fundamentals, the combination of rising interest rates and recession pressures has brought real challenges to commercial real estate."