Real Estate

US commercial real estate a year after the SVBacle

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It’s now well over a year since the whole Silicon Valley Bank debacle, the subsequent US banking turmoil, and the fears over commercial property that were jacked up from a healthy simmer to a full boil. How have things gone?

Alex Scaggs was all over the topic before she went on maternity leave, but in her absence we decided to read Goldman’s latest report on the topic. The quick summary is “volatile, dispersed, but not systemic”. Phew.

Overall, debt capital remains available for borrowers that can withstand more restrictive and costlier financing options. Refinancing needs have also been partially addressed via loan modifications — a trend we think will persist.

From a credit performance standpoint, the share of loans behind on their debt service payments or being worked out by lenders has increased. But this increase is yet to translate into higher losses on loan portfolios, keeping systemic concerns in check.

Lastly, aside from office properties, property operating performance has generally remained resilient, though dispersion across and within property types has been elevated. Save for apartments, newer and higher-quality properties will likely continue to outperform older properties, in our view. And while some regional supply overhang will keep weighing on near-term net operating income, the historically low level of construction starts bodes well for longer-term rent growth in apartment and industrial properties.

The work Goldman’s analysts have done on Mortgage Bankers Association data — looking at who is lending to CRE — is pretty interesting.

Widespread fears that SVB’s collapse and the wider US banking ructions that followed would cause a massive retrenchment have mostly proven unfounded. US banks have slowed their lending to commercial property, but loan books have not contracted. At the same time non-bank lenders — which many thought would be the natural beneficiaries from the turmoil — have stepped back.

The non-bank retrenchment is probably driven by mortgage REITs, which have been hurt by wider spreads. More surprisingly, the growth of bank CRE lending has been driven by smaller banks, with the 25 largest US lenders shrinking non-residential commercial and multifamily mortgage books by 4 per cent and 1 per cent year-on-year respectively, Goldman’s analysts note.

By contrast, smaller banks have seen non-residential and multifamily mortgage books grow by 5% and 10%, respectively. Interestingly, while large banks have posted weaker loan growth, the most recent Federal Reserve Board’s Senior Loan Officer Opinion Survey showed that a higher share of smaller banks are tightening lender standards vs. large banks. We suspect that this puzzle is explained by the pullback of very small banks (with less than $100 million in assets), consistent with holdings data from FDIC call reports.

Anyway, Goldman Sachs has kindly made the full report public. Gorge on the whole thing here.


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