Real Estate Sector Ideas

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>>> Prologis to buy industrial properties from Blackstone for $3.1 billion


by Reuters

June 26, 2023


https://www.msn.com/en-us/money/other/prologis-to-buy-industrial-properties-from-blackstone-for-3-1-billion/ar-AA1d3tsV?OCID=ansmsnnews11


(Reuters) - Prologis Inc said on Monday it has agreed to buy 14 million square feet of industrial properties from real estate funds affiliated with Blackstone for $3.1 billion in an all-cash deal.

The acquisition price represents about "4% cap rate in the first year and a 5.75% cap rate when adjusting to today's market rents", the warehouse-focused real estate investment trust (REIT) said in a statement.

This deal expands Prologis' presence to Atlanta, Washington DC, California, Dallas, Las Vegas, New York regions, Phoenix and South Florida, and its relationship with 50 existing customers and adds 77 new customers.

The company plans to hold all of the properties acquired. It currently owns 1.2 billion square feet of logistics real estate in 19 countries.

"This transaction demonstrates the exceptional demand for high-quality warehouses. With near record-low vacancy, logistics remains a high conviction theme for us," Nadeem Meghji, head of Blackstone Real Estate Americas, said.

Prologis and Blackstone have completed more than a dozen transactions together in the past 11 years, according to the statement.

Prologis has been expanding its presence in the U.S., with the company last year acquiring Duke Realty Corp for about $23 billion, including debt, in an all-stock deal.

The deal with Blackstone is expected to close by the end of the second quarter.

Eastdil Secured, Barclays, BofA Securities, Citigroup Global Markets, Deutsche Bank Securities, Goldman Sachs, J.P.Morgan Securities, Morgan Stanley, PJT Partners and Wells Fargo acted as financial advisers to Blackstone.

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>>> Landlords Face a $1.5 Trillion Bill for Interest Only Commercial Mortgages

Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013, according to Trepp.


Mish Talk

JUN 6, 2023


https://mishtalk.com/economics/landlords-face-a-1-5-trillion-bill-for-interest-only-commercial-mortgages


Share of Interest Only Commercial Mortgage Backed Securities




Commercial Real Estate Bust

A trend to walking away from commercial mortgages is just beginning. The Wall Street Journal reports Interest-Only Loans Helped Commercial Property Boom. Now They’re Coming Due.

Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013, according to Trepp. Nearly $1.5 trillion in commercial mortgages are coming due over the next three years.

Fitch Ratings recently estimated that 35% of pooled securitized commercial mortgages coming due between April and December 2023 won’t be able to refinance based on current interest rates and the properties’ incomes and values. While many malls and hotels face high default risks, the situation is particularly dire for office owners.

Mark Edelstein, chair of law firm Morrison Foerster’s global real-estate group, said he is seeing more lenders take over office buildings than at any point since the early 1990s.

Oblivious to Risks

Lenders and borrowers had widespread belief in two things, both now proven false.

Interest rates would stay low forever

Property values, already clearly in a bubble, would keep rising forever

Now a $1.5 trillion bill is coming due, with property values, especially office space and some big city hotels, plunging like a rock.

83 Percent on Securitized Office Loans in Trouble

Xiaojing Li, managing director at data company CoStar’s risk analytics team, estimates that as much as 83% of outstanding securitized office loans won’t be able to refinance if interest rates stay at current levels.

The 1,921 Room Hilton Union Square Hotel in San Francisco Was Just Abandoned

Yesterday, I noted The 1,921 Room Hilton Union Square Hotel in San Francisco Was Just Abandoned

Park Hotels & Resorts also walked away on the nearby 1,024-room Parc 55. Park Hotels & Resorts cited the continued debt burden of the two hotels and multiple factors that have made the San Francisco market less desirable.

Well, don't worry. Lenders who are handed back the keys can recoup their losses if they borrow money and plow it all into Nvdia and Apple with leverage. /sarcasm

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>>> Blackstone REIT Continues Trend Of Bad News For Real Estate Investors


Benzinga

by Eric McConnell

June 5, 2023


https://finance.yahoo.com/news/blackstone-reit-continues-trend-bad-193739975.html


Blackstone real estate investment trust (BREIT) is known as one of America’s largest and most dependable privately held REITs when it comes to delivering investor returns. However, 2023 has proven to be a difficult year for real estate investors, and Blackstone is not immune. As of May 1, 2023, Blackstone announced it is limiting investor withdrawals from its REIT, which is worth an estimated $70 billion.

This move is not a new trend, as Blackstone has been limiting monthly investor withdrawals since November. A clause in Blackstone’s standard shareholder agreement allows the company to limit withdrawals if the total amount of the withdrawal requests exceeds 5% of the fund’s net asset value. In what can be seen as a sign of the times for the troubled real estate market, Blackstone hasn’t released an estimate on when it may fulfill all investor redemption requests.

Blackstone investors requested a combined $4.5 billion in redemptions in April, but the fund only approved the release of $1.3 billion (29%) of the total requests. In March, investors also requested a total of $4.5 billion in redemptions, only for the fund to release $666 million in funds or 15% of the total amount.

So, it’s not necessarily that Blackstone isn’t paying out at all, it’s that investors heading for the exit doors may have to wait in line before they can cash out. It’s understandable that Blackstone exercises the limitations clause on investor redemptions, but the news comes as a severe blow to investors, many of whom have been dealing with the effects of a declining real estate market for the last several months.

It’s not hard to imagine that many of the investors making the recent redemption requests were looking at Blackstone as their safe harbor REIT — the one that they could rely on when other real estate and investment holdings began to underperform. The overall trend of the commercial real estate market is down for several reasons, not the least of which is a steady diet of rate increases from the Federal Reserve.

Why Is Blackstone Suffering Right Now?

Rate increases are hitting the commercial real estate market particularly hard because of the way commercial real estate is financed. Since 2008, REITs, developers and fund managers have taken advantage of historically low interest rates to borrow aggressively because it allowed them to drastically increase the size of their portfolios. However, much of the borrowing for commercial real estate depends on shorter-term financing such as adjustable-rate mortgages (ARMs) or 15-year mortgages that need to be refinanced at some point in the life of the asset.

The need to refinance wasn’t a problem as long as interest rates stayed low. The pro-forma budget on many commercial assets assumed low interest rates, which helped REITs pay out impressive dividends while also making it easy to refinance or sell the asset at a profit to another REIT that could borrow money at a low interest rate to buy it.

When interest rates began to spike as the Fed tried to ward off inflation, a period of easy financing terms and being able to quickly liquidate assets or turn them profitable after renovations turned into the good old days. The new reality caught Blackstone and many other REITs off guard. The question facing Blackstone and other investors now is, how long will the trouble last and how bad will it get?

Hundreds of billions of dollars in commercial real estate assets may be coming up for refinancing in the next several years, and it’s already an impossibility that they will be able to complete those re-fis at the investor-friendly rates the fund managers were planning on. Some of the most dire predictions are for a wholesale slaughter, with foreclosures and plummeting asset values reminiscent of 2008.

Other prognosticators are not so bearish. They believe that there will be a market correction but that the increased liquidity requirements that were imposed on banks after 2008 should be able to stave off massive bank failures if there is a wave of commercial foreclosures.

Some of the increased liquidity requirements were relaxed for regional banks (after an extensive lobbying effort), and this move likely played a role in the collapse of several regional banks collapsed, most notably First Republic Bank, which was taken over by regulators and ultimately sold to JP Morgan Chase last month.

What Does The Future Hold For Real Estate Investors And REITs?

So, what is the long-term future for Blackstone and REIT investors? It probably lies somewhere in between the direst predictions and the most rose-colored expectations of today’s market. At a minimum, it may be a bumpy ride for the next few years, but investors should keep one important thing in mind — real estate’s performance history has shown it to be a resilient asset and a reliable one in terms of delivering returns.

The people who run REITs like Blackstone are well-versed in their fields and have proven track records of performance. As they get used to the new normal, the next stage of deals and acquisitions they make will be more reflective of the new reality confronting investors in terms of acquisitions, opportunity cost and investor returns.

For their part, investors will need to remain patient and increase their due diligence. In the meantime, they may want to consider publicly traded REITs or other investments such as tokenized real estate investing that will allow them to have greater flexibility in terms of liquidating their investment capital when the need presents itself. However, it is unlikely that real estate will cease being a vital investment sector.

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>>> 'Commercial Real Estate Is Melting Down Fast': Elon Musk Warns Home Prices Will Be The Next To Crash — Yet One Property Type Could Prove Resilient


Benzinga

by Jing Pan

June 5, 2023

As a serial entrepreneur who co-founded Tesla Inc., revolutionized the electric car industry and is sending rockets into space, Elon Musk isn’t known for being a real estate guru. But lately, the billionaire has been sounding the alarm for the sector.

“Commercial real estate is melting down fast,” Musk said in a recent tweet. “Home values next.”

He elaborated on the dire forecast during an interview with former Fox News personality Tucker Carlson in April.

“We really haven’t seen the commercial real estate shoe drop. That’s more like an anvil, not a shoe,” Musk said. “So the stuff we’ve seen thus far actually hasn’t even — it’s only slightly real estate portfolio degradation. But that will become a very serious thing later this year, in my view.”

The Tesla CEO pointed out that the work-from-home trend has substantially reduced the use of office buildings around the world. And that does not bode well for commercial real estate.

“Almost all cities at this point have record vacancies of commercial real estate,” Musk said.

But not all commercial real estate is created equal. Here’s one type of property that could be more shockproof than others.

Medical Office Buildings

According to the latest Office National Report from commercial real estate brokerage Marcus & Millichap, medical offices face “fewer headwinds” because of the nature of their practice.

“While most medical office tenants have incorporated some degree of virtual work, hybrid interactions supplement in-person visits rather than replace,” the report said.

In other words, while the remote work trend has transformed the office property landscape, medical office buildings continue to serve a vital purpose because of the need for in-person visits.

Another compelling factor contributing to the resilience of medical offices is America’s aging population. Approximately 10,000 baby boomers reach age 65 in the U.S. every day, and the demand for medical services tends to increase as people grow older.

The report said that this demographic trend could be a backstop for long-term space demand.

To see how resilient medical office buildings are, look at Riverside-San Bernardino. The report highlighted that this region is expected to “maintain the lowest traditional office vacancy rate among major U.S. markets in 2023,” attributed in part to the presence of “strong medical office fundamentals.”

“Medical office vacancy here was at 6.8% in March,” the report said.

Getting A Piece Of The Action

Medical office buildings can be a significant investment, often requiring substantial capital to acquire. The good news? You don’t necessarily have to purchase an entire building. Nowadays, there are multiple avenues for investors to participate.

For instance, some publicly traded real estate investment trusts (REITs) own medical office properties. Investors can gain exposure to the segment by purchasing shares of these REITs.

Here’s a look at two that Wall Street finds particularly attractive.

Healthcare Realty Trust Inc. (NYSE: HR): Healthcare Realty Trust is a REIT that specializes in medical office buildings and outpatient facilities. The company’s portfolio consists of 715 properties in 35 states totaling approximately 41.8 million square feet.

Notably, 72% of the properties are on or adjacent to hospital campuses. The REIT pays quarterly dividends of 31 cents per share, translating to an annual yield of 6.7%. Barclays analyst Steve Valiquette has an Overweight rating on Healthcare Realty Trust and a price target of $25, implying a potential upside of 34%.

Ventas Inc. (NYSE: VTR): Ventas is a healthcare REIT with a broader focus. With more than 1,200 properties in the U.S., Canada and the U.K., the company’s portfolio spans senior living communities, medical offices and outpatient facilities and hospitals as well as life science, research and innovation properties. The stock offers an annual dividend yield of 4.1%. Mizuho analyst Vikram Malhotra has a Buy rating on Ventas and a price target of $53. Since shares trade at $43.70 today, the price target implies a potential upside of 21%.

Income investors are drawn to REITs because they are some of the higher-yielding names in the stock market. But remember, publicly traded REITs — including those that focus on medical properties — are still subject to the stock market’s ups and downs. If you don’t like the volatility associated with publicly traded REITs, note that there are also private market options that allow retail investors to add medical office buildings to their portfolios.

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>>> Commercial real estate poses risks to US banks - and lenders should brace for higher interest rates, JPMorgan CEO Jamie Dimon warns


Business Insider

by Zahra Tayeb

May 23, 2023


https://finance.yahoo.com/news/commercial-real-estate-poses-risks-185708735.html


JPMorgan CEO Jamie Dimon warned commercial-real estate loans could cause problems for US banks.

"There's always an off-sides," he said. "The off-sides in this case will probably be real estate."

The bank's chief also said US lenders should be prepared for benchmark interest rates to climb as high as 7%.

The US banking sector is still recovering from the worst turmoil since the 2008 financial crisis, but its troubles may be far from over.


JPMorgan & Chase CEO Jamie Dimon has warned that the next jolt to the American banking system could come from commercial real-estate (CRE) loans.

Stress has been mounting for months in the commercial property industry, which is being buffeted by headwinds including high interest rates, tighter credit conditions, and work-from-home trends causing office vacancies. That's fueling concerns about potential loan defaults by the more vulnerable borrowers in the sector.

"There's always an off-sides," Dimon said during the bank's investor conference on Monday, per CNBC. "The off-sides in this case will probably be real estate. It'll be certain locations, certain office properties, certain construction loans. It could be very isolated; it won't be every bank," he added.

Additionally, banks - especially smaller ones - should also brace for the risk of benchmark interest rates rising even higher, possibly up to 6% or 7%, according to Dimon. The Federal Reserve has boosted its policy rate to more than 5% currently, from near-zero levels in the first quarter of 2022.

"I think everyone should be prepared for rates going higher from here," Dimon said, according to CNBC.

Small and mid-sized US regional lenders are highly exposed to the CRE industry - financing around 70% of all debt in the sector - and that's made investors anxious about the overall health of the US financial system given the risk of CRE loan defaults.

Dimon said the banking industry is already building capital for potential losses by squeezing its lending activity.

"You're already seeing credit tighten up because the easiest way for a bank to retain capital is not to make the next loan," he said.

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>>> While Brookfield Properties defaulted on $1 billion of loans, they lost $850 million in their prior equity value in these properties.

333 S Hope Street $701 million
333 S Grand Ave $656 million
725 S Figueroa Street $497 million

These properties are essentially fully leased, although there is a substantial amount of space available for sublease. Brookfield must have been facing a lot of lease expirations they didn't think they could fill.

A US debt default would really knock the floor out from under commercial real estate values

Brookfield had previously filed an application to add a residential high-rise to Bank of America Plaza, a 55-story office tower located at 333 S. Hope Street.

The project, named the Residences at 333 South Hope Street, would replace a portion of the building's plaza and parking structure with a new 34-story edifice featuring 366 studio, one-, and two-bedroom dwellings with a 425-square-foot cafe located at street level.

At one time this added residential would have saved their bacon. -

https://downtownla.com/building/residences-at-333-south-hope-street




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>>> New York skyscrapers sit empty as Manhattan reels from rise of home working


The Telegraph

by Riya Makwana

May 20, 2023


https://finance.yahoo.com/news/york-skyscrapers-sit-empty-manhattan-110000787.html


Simon Mitchell’s office in Union Square, New York City has had an eerily empty feel since the Covid pandemic. With four in five desks unused in a space with capacity for 300, the marketing manager only goes in when he feels like he might have some company.

Union Square was once known for its bustling bars and restaurants, into which office workers would swarm as they enjoyed their fast-paced city lives. The change in the area today is stark.

Mr Mitchell, his partner and their one-year-old baby moved to Queens just after the pandemic. He has no intention of returning to the office full time.

“Rents are sky high and if you can avoid paying City prices on food and have a flexible lifestyle, why would you go into the office more?” he says.

Not even cheap subway commuting could entice him or his colleagues back to the office, Mr Mitchell adds. “I wouldn’t even consider taking a job that didn’t offer flexibility”, he says.

While New York is starting to show signs of life, only around half the number of workers that should be in the office have returned more than a year on from the pandemic. Vacancy rates for office buildings in central New York have hit 22.7pc, up 11.4pc on pre-pandemic levels.

Meanwhile, the level of workers returning to the office has plateaued at around 60pc, data from The Real Estate Board of New York shows. The consultancy group has warned of a coming wave of “zombie” buildings rendered barely functional due to low vacancy rates.

Some skyscrapers are already lifeless. The 47-story tower at 60 Wall Street has sat empty since 2021, when Deutsche Bank – its only tenant – relocated uptown, to the edge of Central Park. The building’s owners, Singapore’s sovereign wealth fund and Paramount Group, have undertaken an expensive renovation in order to tempt in new tenants.

Eric Adams, the City’s mayor, has urged workers to return to the office as the city struggles with a shifting landscape. He said last year: “You can’t run New York City from home”.

But employees’ desire for flexibility is higher “than ever”, says David Smith, head of Americas insights, global research at Cushman & Wakefield New York. “And this demand is greater here than in any other part of the world,” he adds.

White-collar workers are fleeing New York in huge numbers for a life free from commuting, says Mr Smith, as well as the option to spend more time on their families and other personal pursuits.

“It’s particularly people in their late twenties and thirties who are unwilling to return to the office full time,” he adds.

The lack of people returning to the office has hit the local economy, with remote work costing New York around $4,661 (£3,750) annually for each worker, according to Bloomberg, as employees spend less on food and entertainment at businesses around their offices.

There is currently around 22.7 million sq ft of sublet space in New York, with this figure rising as companies look to shrink their office footprints.

Agents note that the majority of companies releasing space are in the tech or media industries. Spotify recently put 200,000 sq ft on the market for sublease at 4 World Trade Center, vacating five of its floors. Facebook also announced it is subletting roughly 250,000 sq ft of their 1.9 million sq ft office space in Hudson Yards.

In response, companies have mandated a return to the office. Blackrock, the world’s largest asset manager, on Tuesday announced that staff must be on-site for at least four days a week.

In a memo, bosses wrote: “Career development happens in teaching moments between team members, and it is accelerated during market-moving moments, when we step up and get into the mix. All of this requires us to be together in the office.

“We will shift to at least four days per week in the office, with the flexibility to work from home one day per week. This new approach begins on 11 September.”

Other companies have put similar policies in place, JP Morgan recently told its senior bankers to return to the office for a full five days, adding that slackers would be punished for poor attendance.

At the time, the bank said: “As we’ve returned to more normal patterns in our lives and work, we can all appreciate the many benefits of in-person engagement.

“We believe this is especially true when it comes to the importance of being in the office – being together improves the speed of decision making, while also providing valuable opportunities for spontaneous learning and creativity, as well as allowing our professionals to learn through our apprenticeship model.”

Blackrock’s announcement came after it committed to downsizing its headquarters in New York. Fellow asset manager Macquarie and Twitter have also shrunk their footprint.

Surprisingly, the most famous buildings in New York are not the most attractive to big name companies – and have not been for a long time, says Andrew Lim, JLL New York City research director.

LinkedIn’s head office, located in the Empire State Building, is leased for five more years. Agents have speculated that the business will look to reduce the space it occupies once its tenancy is over, with a move to more modern offices in mind.

“These older buildings have characteristics that are not as popular today with occupiers who tend to prefer newer buildings that have amenities, modern finishes and more customizable layouts,” Mr Lim says.

According to JLL, around 25 million sq ft of office space in Manhattan alone has sat empty and on the market for more than 24 months. Agents and investors believe that the next logical step would be to repurpose these buildings, with around six million sq ft of office space being considered for conversion into residential or retail space, among other uses.

On the mainland, Washington DC is leading the way by committing to converting 40 offices into residential buildings, according to Cushman & Wakefield. That trend is already spreading to the east coast, with at least four office buildings due to be converted. If it continues, New York’s empty skyscrapers could become towers of housing.

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>>> Brookfield's Downtown L.A. Trophy Towers Falling Like Dominoes

Payments now have been missed on a $275 million loan for the 41-story EY Plaza.


Globest.com

By Jack Rogers

May 18, 2023


https://www.globest.com/2023/05/18/brookfields-downtown-l-a-trophy-towers-falling-like-dominoes/?slreturn=20230420035147


A year ago, Brookfield Property Partner’s downtown Los Angeles office portfolio encompassed 8 million square feet, including four of the city’s highest-profile trophy towers. It was not a stretch to say that the Canadian REIT dominated the downtown Los Angeles skyline.

What a difference a year makes: Brookfield has now defaulted or missed payments on collateralized mortgage backed security loans encompassing more than $1 Billion that are backed by three of its largest downtown Los Angeles office trophies...

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>>> San Francisco fire sale: downtown high rise selling at a 73% discount


Fox News

by Aislinn Murphy

May 17, 2023


https://finance.yahoo.com/news/san-francisco-fire-sale-downtown-120042720.html


A high-rise office building in San Francisco’s financial district is reportedly being sold for significantly lower than what it had been valued at a few years ago, potentially providing a signal for the city’s office market.

The San Francisco Business Times first reported last week that unnamed sources said the 350 California Street high-rise is being purchased for a per-square-foot price that equates to a value in the $60 million to $67.5 million range. The outlet identified SKS Real Estate Partners as the buyer of the Mitsubishi UFJ Financial Group-owned property.

According to the San Francisco Business Times, the $67.5 million figure marks a 73% decrease from 2020, when the high-rise belonged to Union Bank who listed it for approximately $250 million. An investor from South Korea is reportedly also involved on the buyer’s side.

CBRE reported San Francisco’s office market having a vacancy rate of 29.4% for the first quarter. In the prior quarter, it was 27.6%, according to the real estate company.

COMMERCIAL REAL ESTATE INDUSTRY ON EDGE AS DOWNTOWN EMPTY OFFICE SPACE GOES UNUSED

FOX Business sent an inquiry to SKS Real Estate Partners about the reported purchase. Mitsubishi UFJ Financial Group Americas declined to comment.

With the reported transaction of 350 California Street, participants in San Francisco’s office space market could potentially have a new gauge in terms of pricing. On the seller’s side in the deal, CBRE’s Kyle Kovac and Mike Taquino provided representation.

Derek Daniels, research director for San Francisco at Colliers International, told FOX Business on Tuesday that the 350 California Street sale will be a "great data point for our market right now."

"It will give other market participants a great data point to look to for other potential sales that might be happening," he continued. "It’s a jolt of positivity for the San Francisco market that an institutional, local owner is willing to make a significant investment."

SAN FRANCISCO'S ‘DOOM LOOP’ THREATENS TO GUT DOWNTOWN ECONOMY AS EMPLOYEES WORK FROM HOME

Daniels said the buyer was "going to have to put a lot of capital into the property to get it to the point where it can be leased again, but it is in the north financial district and California Street’s a great address, great street to be on." The Real Deal, which also covered the sale, reported 350 California Street’s vacancy rate was around 75%.

The reported fire sale of the high-rise comes as San Francisco’s office market has continued to deal with high vacancy rates stemming from factors including the COVID-19 pandemic and tech companies located in the city letting their employees work remotely.

San Francisco is the third-best city for jobs in 2022, according to WalletHub.

Daniels described the market as "very challenged right now." He noted San Francisco saw a "massive spike in subleases" early in the pandemic, adding that tech "was easily able to go remote and a lot of firms kind of went that route right away."

Colliers International, where he works, said in its latest office market report for the city that the overall vacancy rate came in at 23% for the first quarter. That proportion was notably higher than the 5.3% in the same three-month period in 2020. Availability has also hit a record high.

Meanwhile, CBRE reported San Francisco’s office market having a vacancy rate of 29.4% for the quarter. In the prior quarter, it was 27.6%, according to the real estate company.

Daniels expressed optimism about return-to-office recovery in the long-term.

"The sentiment in the industry is that with announced layoffs, I think the pendulum is going to swing back in management’s favor to get folks back in the office," he said.

He also pointed to recent growth in the artificial intelligence sector.

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>>> Commercial Real Estate Prices in the US Fall for First Time Since 2011


Bloomberg

by Rich Miller

May 17, 2023


https://finance.yahoo.com/news/commercial-real-estate-prices-us-210410652.html


(Bloomberg) -- US commercial real estate prices fell in the first quarter for the first time in more than a decade, according to Moody’s Analytics, heightening the risk of more financial stress in the banking industry.

The less than 1% decline was led by drops in multifamily residences and office buildings, data culled by Moody’s from courthouse records of transactions showed.

“Lots more price declines are coming,” Mark Zandi, Moody’s Analytics chief economist, said.

The danger is that will compound the difficulties confronting many banks at a time when they are fighting to retain deposits in the face of a steep rise in interest rates over the past year.

Excluding farms and residential properties, banks accounted for more than 60% of the $3.6 trillion in commercial real estate loans outstanding in the fourth quarter of 2022, with smaller institutions particularly exposed, according to the Federal Reserve’s semi-annual Financial Stability Report published last week.

“The magnitude of a correction in property values could be sizable and therefore could lead to credit losses” at banks, the report said.

Fed Vice Chair for Supervision Michael Barr told lawmakers on Tuesday that supervisors have increased their oversight of financial institutions with significant exposure to the sector. “We’re looking quite carefully at commercial real estate risks,” he said.

The price declines seen so far have been more marked for higher-priced properties, according to commercial property company CoStar Group. Its value-weighted price index has fallen for eight straight months and in March stood 5.2% lower than a year ago.

Transactions though have been limited in a market still coping with the aftershocks of the pandemic.

The rise in employees working from home has driven some downtown retailers and restaurants out of business and forced owners of office buildings to reduce rents to retain tenants or to sell all together.

What Bloomberg Economics Says

“Regional and community banks currently account for a disproportionately large share of office real estate lending. Further consolidation of the banking industry may prove to be the solution that allows the banking industry at-large to work out problem loans.”

- Stuart Paul (economist)

Post Brothers recently bought a Washington office building that went for $92.5 million in the fall of 2019 for $67 million, while Clarion Partners is offering a San Francisco office tower for roughly half of what it paid around a decade ago.

Banks held more than $700 billion in loans on office buildings and downtown retailers in the fourth quarter of last year, according to the Fed. More than $500 billion of that was extended by smaller lenders.

Lending officers at banks told the Fed that they further tightened credit standards on commercial real estate loans in the first quarter.

Paul Ashworth, chief North America economist for Capital Economics, sees the risk of a “doom loop” developing, with a pull-back in lending by banks leading to a steeper drop in commercial real estate prices, in turn prompting even further cuts in credit.

One potential bright spot: The big run-up in prices in past years has left many borrowers with substantial equity cushions in the properties they own. That reduces the dangers of defaults and limits the potential losses for lenders.

The loan-to-value ratio of mortgages backed by office buildings and downtown retail properties was in the range of 50% to 60% on average at the end of last year for credit extended by bigger banks, based on data collected by the Fed.

“Delinquencies and defaults will rise, but I don’t think we’ll see a lot of forced sales,” Zandi said.

He forecasts prices dropping about 10%, assuming the US skirts a recession. If it doesn’t, the declines could get a lot worse.

“We’re on a razor’s edge here,” he said.

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