Commercial Property Could Be The Next Top Risk For Banks
USA – If market watchers are anxious over the impact of the collapse of California’s Silicon Valley Bank and New York’s Signature Bank on the banking industry, the next big fallout could be from the sector’s significant exposure to the deteriorating commercial property industry, reported Bloomberg on Tuesday morning (14 March, SGT).
In the past few weeks, a landlord controlled by Pacific Investment Management defaulted on around US$1.7 billion of mortgage notes backed by 7 office properties in places, like Boston, New York, and San Francisco.
Prior to that a unit of Brookfield Corporation defaulted on debt linked to 2 office towers in Los Angeles. A watchlist of loans that could be in distress now include a US$1.2 billion mortgage collateralised by a San Francisco office building jointly owned by Vornado Realty Trust and former President Donald Trump.
If the bank runs hasten the coming of the next recession, expect to see many more commercial assets fall into default, which is bad news for financial firms as they have increased their funding for commercial properties.
BNY Mellon strategist John Velis revealed that loans backed by commercial assets now account for nearly 24 percent of all bank loans in the United States – the highest rate since the 2008 Global Financial Crisis.
One reason financial firms have so much exposure to commercial properties is that it has become more difficult to sell the risk to investors. In fact, the yearly issuance of commercial mortgage-backed securities (CMBS) plunged from US$240 billion in 2007 to just US$60 billion in 2020.
Furthermore, below is the research note published by Velis before the collapse of Silicon Valley Bank and Signature Bank.
“In textbook monetary policy, rate hikes are intended to tighten financial and credit conditions, leading to lower economic activity. However, certain parts of the economy, in particular where significant leverage is present, can come under duress, often leading to financial-sector strains.”
“We are keeping an eye on commercial real estate loans as one area of the financial system where we see vulnerabilities present,” he added.