It doesn't sound like much, I mean what does a billion buy you these days? A couple of villas and a yacht and you're done.
Also, according to TFA, this is about 600 buildings, of which 224 might be problematic. What happens when they are not refinanced? They are owned by the bank just the same.
> What happens when they are not refinanced? They are owned by the bank just the same.
A fiend in CRE explained that defaulting on these debts is a calculated risk built in to the office owners' business models.
They secure financing with the hope that the investment will pay off, but if it goes under then they let that specific building's isolated business fail. The bank takes ownership of the property and must sell it off at a discount.
The same people who owned the building originally might then go back and bid on the same building again at the new, lower rate.
Both the banks and the CRE operators understand that his is how the game is played, so it's priced in to the cost of financing (in theory). Letting the bank repossess a property is just a business decision.
Agree. I could see this being a “do your business or get off the toilet” moment. One option is repurposing that real estate to better purposes, like residential or industrial depending on location. It would take significant amounts of investment, but that’s actually the market working as intended.
I am aware of attempts to repurpose such properties, cheaply, to residential have generally sucked. That just indicates better, costlier options will need to be explored. High rises and high density living actually exist many places.
Does not yet sound like a hair on fire/bailouts level problem. We would need to see some Ts instead of Bs for that.
Then there’s the reality of the US economy still responding to the changes following the pandemic. Literally all modern markets have not experienced anything like this since the last pandemic was 1918. That was a very different time in international and national trade.
The market is a hugely decentralized grouping of economies. Each economy itself composed of millions to billions of individuals making individual decisions with finite resources. That’s precisely the genius of the system. No single person or policy maker could take on and make all the most optimized decisions for all the people in the global market.
The thing is - I'm not sure the bank wants to own any of those buildings, even profitable ones. It's a bank, not a real estate investment fund. The amount of money spent on upkeep, taxes, land, finding a buyer, etc... can be and often is quite significant and for a bank, that's capital that could be better deployed elsewhere (which also more often than not aligns better with the core functionalities of the bank).
This can be a "tip of the iceberg" type figure. If interest rates remain high or go higher and economy continues to slide or if the need for office space due to remote work is permanently reduced, then demand will continue to fall and then $117B can snowball into trillions rather quickly.
Expect a ton of restructuring deals. Banks don’t want to repossess these properties, especially in the middle of this economy. At this level banks are partners, not just lenders. They have a vested interest in keeping these buildings useful. A multimillion dollar building is not a user car or even a suburban home.
But commercial mortgages usually have stipulations like a minimum rental price. Everyone boogie man’s zoning, but these mortgages also limit freedom. Many empty buildings couldn’t rent at a lower price even if they wanted to. The banks don’t want managers undercutting each other, and wrecking market value. But they will have to relent eventually.
Expect less new builds in the future, but more renovations. Building managers face a tough market right now, and will need to invest in existing stock to compete.
I recently discovered that in my old neighborhood in Chicago, 4 high rise residential towers have started construction in a 3-block radius in the last 6 months. And over on the other side of downtown, developers have secured financing to begin construction of an 800+ foot tall apartment building on the site of the $300 million hole in the ground (an Irish developer had planned to built a 2000 foot tall building, but went bankrupt while building the foundation).
I saw a report by the city of Chicago last month that broke out office vacancy by age of the building, and in new towers the vacancy rate is single digits. Now, you and I both know that the likely explanation is that the tenants of these buildings were solid companies that signed long-term leases as the construction was finishing up. Once those first leases end, all bets are off.
But, “It Is Difficult to Get a Man to Understand Something When His Salary Depends Upon His Not Understanding It”. Builders are going to point at that stat and say that new office towers are a good investment. Lenders are going to point at that stat and say that new office towers are safe to finance.
It'd be interesting to see the total value of derivatives based on these mortgages is, I didn't see that in the article anywhere.
Anyone happen to know how common it is for these kinds of commercial real estate loans to be rolled up into other derivatives similar to what led to the housing crisis?
The posted article doesn't have any relevant content ("Try unlimited access Only $1 for 4 weeks"), but based on the headline all I can think is please please pretty please maybe this time the government can perhaps let some defaulting actually happen? Of course we know the answer is always going to be more money printing to support the rigged heads-they-win tails-we-lose game, and the whole point of this article is part of the media push to make that happen. The main question is what related sector of the economy they'll ruin in the process.
I understand the sentiment, and often feel this way too, but I think it's reductive to assume the answer is to let large companies/investors to fail.
Ideally, if we ensure adequate diversity in the market, then having companies default makes sense -- then one company going under won't trigger a string of defaults that can cripple a sector of the economy.
But when we let businesses concentrate effort or corner markets, then there can be catastrophic consequences to the economy when these large entities go belly up. Efforts should be put in place to mitigate these issues.
Ultimately, I think the pragmatic approach is to assess defaulting on debt on a case-by-case basis. I'd prefer if a panel of economists across the ideological spectrum came to a consensus for each case based on the latest understanding of the market, but I know it's more likely going to be politicians choosing the argument that best fits their worldview.
Do you realize the impact this would have on pension plans and mom and pop investment portfolios too? It isn’t just Bezos and other billionaires who would feel pain - it would be a lot of regular folk getting annihilated financially as well.
Unlike US home loans, commercial mortgages are almost entirely interest- only. That means developers of large properties tend to have low monthly payments, but face a balloon payment equal to the original loan the day the mortgage comes due.
That is an odd detail I was not aware of... this seems to be a significant advantage for commercial mortgages over residential ones. Are they less leveraged or something? That doesn't square with the "40 per cent of office loans on bank balance sheets were under water" statement later in the article.
This is not driven by fundamentals; this has everything to do with financing costs going back up
Seems like a disingenuous statement. Demand for office space has fallen. And according to the article, demand was overstated when these now-due loans were originally made.
“Everyone will blame Covid [for] the losses,” said John Griffin, a professor at Texas university. “But Wall Street’s aggressive underwriting of commercial mortgage debt is going to make the situation a whole lot worse than it would have been.”
I think this just reflects a sales strategy. Back when it didn't look like commercial was risky, you could win business by advertising a low monthly payment.
Interest-only works for commercial because the building is (hopefully) making money, so some of that can be set aside to handle the last payment. That doesn't work for residential, because single-family homes don't usually make money, so residential homebuyers don't typically have ~$200,000-$2,000,000 in cash at the end of the 30 year period. But if that was feasible, you would see some loan officers trying to win business through offering interest-only mortgages with a balloon payment.
As for why underwriting didn't catch this? Underwriting is a lot like actuaries, they've got a bias towards recent population-level data. So for the last 30 years the rates of commercial default have been predictable, and it's tough to push back to execs on the risk. You're claiming that a potential wide-scale change in the way the U.S. works should impact sales strategy today, and before Covid that risk was very abstract. Very few execs would side with their underwriters over their sales team, and there's been subtle pressure on underwriters to price commercial real estate as though systemic risk isn't real.
> this seems to be a significant advantage for commercial mortgages over residential ones.
"Interest only" loans are not really advantageous. It means by default you are never paying down your principal and you are forced to refinance when the balloon payment is due (usually 5 years or so). So if you signed a loan when rates were low, you would have been better off to get a long term 30 year fixed interest loan. Otherwise your payment can more than double or triple right along with interest rates.
And since you're not paying down the principal, it's easier to find your loan under water. Although it is typical for commercial real estate loans to require a 20% down payment.
This kind of mortgage was very popular before 2008. Many US homes were mortgaged at interest only rates. People however saw how dangerous this can be in the aftermath of the great recession, as a record number of Americans lost their homes.
You can get residential interest only mortgages - at least here in the UK.
I used to have one, but remortgaged to repayment ten years ago.
It's quite common to see "buy to let" mortgages as interest only rather than repayment, where the owner is concerned with cashflow rather than the asset itself.
You can - at least some places - get residential mortgages that are interest only too, but they're not popular for good reason because of the risk involved.
2024 will make for an interesting year for the debt world. Seems like everyone and everything has debts coming due. Commercial real estate no exception.
commercial real estate tumbles. Followed by municipal bonds tumbling. Cities file for bankruptcy. Growth stagnates permanently since the income from taxes does not fully sustain most cities today. This is largely due to highly inefficient city planning and infrastructure planning (suburban sprawl, highways, and continued dependency on car centric travel generate significant amounts of long term debt that accrue at all levels).
If you are wondering why you are returning to office (RTO) despite 3-4 years of profitable quarters… It’s not because of “cUlTuRe”, “wOrK pRoDuCtIvItY”, “coMmUnIcaTiOn gApS”, or “iNcReAsInG cOlLabOraTiOn”
It’s because the bag holders of these assets (ie, REITs, ibanks, hedge funds, foreign ibanks and investors) are at risk. Ultimately, the US government and to a certain degree state and local governments have guaranteed a large portion of these assets.
These investors need to pump their numbers (ie, occupancy rates, leases, …) in order to keep the con going. Often the building managers will dangle “free” upgrades in the faces of these corporate real estate managers to keep the leases active in exchange for guaranteed occupancy rates.
I hate this country sometimes. Shit like this is why we will never have a sustainable economy
Why would a company RTO to keep the building's investors happy? They probably have different owners whose interests are at odds.
The real estate guys want the building full to maximize rent income, but the company owners want to minimize rent expense. They are min-maxing against one another.
Companies RTO because:
a) they are run by people who don't get remote work
b) they do something that involves being physically present
c) layoff-by-RTO
d) it's possible the government incentivizes RTO, but this is a short-term trick at best. RTO is unpopular with workers and most capital are invested in companies, not office buildings. All of those companies have a natural interest in minimizing rent.
[+] [-] the-dude|2 years ago|reply
Also, according to TFA, this is about 600 buildings, of which 224 might be problematic. What happens when they are not refinanced? They are owned by the bank just the same.
[+] [-] Aurornis|2 years ago|reply
A fiend in CRE explained that defaulting on these debts is a calculated risk built in to the office owners' business models.
They secure financing with the hope that the investment will pay off, but if it goes under then they let that specific building's isolated business fail. The bank takes ownership of the property and must sell it off at a discount.
The same people who owned the building originally might then go back and bid on the same building again at the new, lower rate.
Both the banks and the CRE operators understand that his is how the game is played, so it's priced in to the cost of financing (in theory). Letting the bank repossess a property is just a business decision.
[+] [-] ianai|2 years ago|reply
I am aware of attempts to repurpose such properties, cheaply, to residential have generally sucked. That just indicates better, costlier options will need to be explored. High rises and high density living actually exist many places.
Does not yet sound like a hair on fire/bailouts level problem. We would need to see some Ts instead of Bs for that.
Then there’s the reality of the US economy still responding to the changes following the pandemic. Literally all modern markets have not experienced anything like this since the last pandemic was 1918. That was a very different time in international and national trade.
The market is a hugely decentralized grouping of economies. Each economy itself composed of millions to billions of individuals making individual decisions with finite resources. That’s precisely the genius of the system. No single person or policy maker could take on and make all the most optimized decisions for all the people in the global market.
[+] [-] NickC25|2 years ago|reply
[+] [-] chrisco255|2 years ago|reply
[+] [-] dexwiz|2 years ago|reply
But commercial mortgages usually have stipulations like a minimum rental price. Everyone boogie man’s zoning, but these mortgages also limit freedom. Many empty buildings couldn’t rent at a lower price even if they wanted to. The banks don’t want managers undercutting each other, and wrecking market value. But they will have to relent eventually.
Expect less new builds in the future, but more renovations. Building managers face a tough market right now, and will need to invest in existing stock to compete.
[+] [-] Kon-Peki|2 years ago|reply
Builders want to build, and lenders want to lend.
I recently discovered that in my old neighborhood in Chicago, 4 high rise residential towers have started construction in a 3-block radius in the last 6 months. And over on the other side of downtown, developers have secured financing to begin construction of an 800+ foot tall apartment building on the site of the $300 million hole in the ground (an Irish developer had planned to built a 2000 foot tall building, but went bankrupt while building the foundation).
I saw a report by the city of Chicago last month that broke out office vacancy by age of the building, and in new towers the vacancy rate is single digits. Now, you and I both know that the likely explanation is that the tenants of these buildings were solid companies that signed long-term leases as the construction was finishing up. Once those first leases end, all bets are off.
But, “It Is Difficult to Get a Man to Understand Something When His Salary Depends Upon His Not Understanding It”. Builders are going to point at that stat and say that new office towers are a good investment. Lenders are going to point at that stat and say that new office towers are safe to finance.
Count on it.
[+] [-] _heimdall|2 years ago|reply
Anyone happen to know how common it is for these kinds of commercial real estate loans to be rolled up into other derivatives similar to what led to the housing crisis?
[+] [-] the-dude|2 years ago|reply
[+] [-] mindslight|2 years ago|reply
[+] [-] nsagent|2 years ago|reply
Ideally, if we ensure adequate diversity in the market, then having companies default makes sense -- then one company going under won't trigger a string of defaults that can cripple a sector of the economy.
But when we let businesses concentrate effort or corner markets, then there can be catastrophic consequences to the economy when these large entities go belly up. Efforts should be put in place to mitigate these issues.
Ultimately, I think the pragmatic approach is to assess defaulting on debt on a case-by-case basis. I'd prefer if a panel of economists across the ideological spectrum came to a consensus for each case based on the latest understanding of the market, but I know it's more likely going to be politicians choosing the argument that best fits their worldview.
[+] [-] mtmail|2 years ago|reply
It's good that you're open about only having read the headline. Another user posted a link to the full article text: https://archive.is/VYBn9
[+] [-] voisin|2 years ago|reply
Do you realize the impact this would have on pension plans and mom and pop investment portfolios too? It isn’t just Bezos and other billionaires who would feel pain - it would be a lot of regular folk getting annihilated financially as well.
[+] [-] the-dude|2 years ago|reply
[+] [-] bloopernova|2 years ago|reply
Not an expert so I can only really pose the question.
[+] [-] fullshark|2 years ago|reply
[+] [-] NewJazz|2 years ago|reply
That is an odd detail I was not aware of... this seems to be a significant advantage for commercial mortgages over residential ones. Are they less leveraged or something? That doesn't square with the "40 per cent of office loans on bank balance sheets were under water" statement later in the article.
This is not driven by fundamentals; this has everything to do with financing costs going back up
Seems like a disingenuous statement. Demand for office space has fallen. And according to the article, demand was overstated when these now-due loans were originally made.
“Everyone will blame Covid [for] the losses,” said John Griffin, a professor at Texas university. “But Wall Street’s aggressive underwriting of commercial mortgage debt is going to make the situation a whole lot worse than it would have been.”
[+] [-] jimberlage|2 years ago|reply
Interest-only works for commercial because the building is (hopefully) making money, so some of that can be set aside to handle the last payment. That doesn't work for residential, because single-family homes don't usually make money, so residential homebuyers don't typically have ~$200,000-$2,000,000 in cash at the end of the 30 year period. But if that was feasible, you would see some loan officers trying to win business through offering interest-only mortgages with a balloon payment.
As for why underwriting didn't catch this? Underwriting is a lot like actuaries, they've got a bias towards recent population-level data. So for the last 30 years the rates of commercial default have been predictable, and it's tough to push back to execs on the risk. You're claiming that a potential wide-scale change in the way the U.S. works should impact sales strategy today, and before Covid that risk was very abstract. Very few execs would side with their underwriters over their sales team, and there's been subtle pressure on underwriters to price commercial real estate as though systemic risk isn't real.
[+] [-] chrisco255|2 years ago|reply
"Interest only" loans are not really advantageous. It means by default you are never paying down your principal and you are forced to refinance when the balloon payment is due (usually 5 years or so). So if you signed a loan when rates were low, you would have been better off to get a long term 30 year fixed interest loan. Otherwise your payment can more than double or triple right along with interest rates.
And since you're not paying down the principal, it's easier to find your loan under water. Although it is typical for commercial real estate loans to require a 20% down payment.
[+] [-] coliveira|2 years ago|reply
[+] [-] joefife|2 years ago|reply
I used to have one, but remortgaged to repayment ten years ago.
It's quite common to see "buy to let" mortgages as interest only rather than repayment, where the owner is concerned with cashflow rather than the asset itself.
[+] [-] vidarh|2 years ago|reply
[+] [-] unknown|2 years ago|reply
[deleted]
[+] [-] axpy906|2 years ago|reply
[+] [-] xyst|2 years ago|reply
[+] [-] EMCymatics|2 years ago|reply
[+] [-] tantivy|2 years ago|reply
[+] [-] xyst|2 years ago|reply
It’s because the bag holders of these assets (ie, REITs, ibanks, hedge funds, foreign ibanks and investors) are at risk. Ultimately, the US government and to a certain degree state and local governments have guaranteed a large portion of these assets.
These investors need to pump their numbers (ie, occupancy rates, leases, …) in order to keep the con going. Often the building managers will dangle “free” upgrades in the faces of these corporate real estate managers to keep the leases active in exchange for guaranteed occupancy rates.
I hate this country sometimes. Shit like this is why we will never have a sustainable economy
[+] [-] FredPret|2 years ago|reply
The real estate guys want the building full to maximize rent income, but the company owners want to minimize rent expense. They are min-maxing against one another.
Companies RTO because:
a) they are run by people who don't get remote work
b) they do something that involves being physically present
c) layoff-by-RTO
d) it's possible the government incentivizes RTO, but this is a short-term trick at best. RTO is unpopular with workers and most capital are invested in companies, not office buildings. All of those companies have a natural interest in minimizing rent.