Amid ongoing warnings of distress in the U.S. commercial real estate market, an analysis has emerged indicating that the flow of money has virtually come to a halt, with related loans sharply declining. Concerns are rising that defaults could increase further in the future.
The Wall Street Journal (WSJ) reported on the 31st (local time), citing data provider Trepp, that the volume of commercial real estate loans from banks decreased during the first two weeks of October. A decline in bank commercial real estate loans has occurred in only two months since 2014. The same trend is confirmed outside the banking sector, which holds the largest share. Loans converted into commercial mortgage-backed securities this year amounted to only $28.2 billion, the lowest since 2011.
The total commercial real estate loan volume, including commercial mortgage-backed securities and non-bank lenders, increased by only 0.98% quarter-over-quarter in the second quarter. Matthew Anderson, Managing Director at Trepp, described this as "an increase of less than 1%" and "the lowest level since Q1 2014 (0.74%)." WSJ stated, "Commercial real estate loans have dropped to historically low levels," adding that "the flow of money has stopped."
Concerns surrounding the commercial real estate market are not new. The surge in remote work during the pandemic sharply reduced office demand, compounded by the Federal Reserve's rapid interest rate hikes and fears of an economic slowdown, delivering a massive blow. Earlier, Charlie Munger, Vice Chairman of Berkshire Hathaway and Warren Buffett’s partner, also warned that banks face risks of distressed loans in the commercial real estate sector, with high interest rates and low rental income expected to reduce property values.
According to data provider MSCI Real Asset, U.S. commercial real estate purchases in Q3 fell 53% year-over-year to $89.2 billion. During the same period, the volume of distressed commercial real estate due to bankruptcies, bank foreclosures, and liquidations surged to $79.7 billion. This is the largest scale since 2013, when the real estate market was depressed following the global financial crisis.
WSJ diagnosed that the recent sharp rise in Treasury yields over the past few months has created an atmosphere of reluctance toward new loans. Most commercial real estate loans are linked to short-term interest rates, but the surge in Treasury yields has exacerbated lenders' anxieties. Michael Levi, CEO of Crow Holdings, one of the largest U.S. apartment and space development companies, said, "(The rise in 10-year U.S. Treasury yields) has unsettled the market," adding, "Capital market turmoil is crushing everyone." James Mulfeld, Executive Director at Eastdil Secured, assessed that "liquidity exists" and the situation is not as severe as during the global financial crisis, but he added, "Costs are likely to be higher."
Furthermore, following the Silicon Valley Bank (SVB) collapse, many lenders, including regional banks, are also facing concerns over distressed commercial real estate loans. PNC Financial Group previously announced that its commercial real estate loan delinquencies increased from $350 million in Q2 to $723 million in Q3. WSJ reported, "Many lenders have lost enthusiasm for new deals," noting that this is especially true for small and regional banks that have been cautious about commercial real estate since the bankruptcies of SVB, Signature Bank, and First Republic.
As a result, with commercial real estate loans sharply declining, concerns are emerging that defaults on maturing properties will increase and new construction starts will decrease. Data analytics firm Dodge Construction Network estimates that commercial real estate construction starts will decline by 17% this year compared to last year, marking the largest annual drop since 2009. The $650 million Dream Las Vegas project, started last year, has also halted construction early this year due to funding issues.
Mark Tigpen, Global Head of Real Estate at law firm King & Spalding, pointed out that all 46 commercial real estate projects nationwide scheduled for completion or development by Q1 next year are either on hold or delayed due to financing issues, emphasizing that "there is no market free from this problem."
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