The turmoil that drove Silicon Valley Bank, Signature Bank, and First Republic Bank out of business continues to rock the wider commercial real estate market.
“Almost two months after the failure of SVB, the picture is quite challenging,” Lofti Karoui, chief credit strategist at Goldman Sachs, wrote in a note this week.
Sales of commercial mortgage-backed securities, or CMBS, have fallen off a cliff, induced by rising interest, which has reduced lending volume and rattled lenders. Data from Goldman Sachs shows that the total CMBS issuance in the first quarter hit the lowest level since 2010, a trend that has spilled over into the month of April.
Adding pressure is investors pulling back from commercial real estate collateralized loans obligations, or CRE CLOs, which were in high demand in 2020 and 2021, but now has collapsed since the start of March, the Goldman Sachs note added.
There are three key themes to the slump in commercial real estate loans, according to Goldman Sachs, in addition to a slowdown in real estate market activity.
First, the bulk of commercial mortgage bonds issued have become “increasingly skewed towards agency CMBS, where the GSEs [government-sponsored enterprises] absorb a portion or the entirety of the underlying credit risk, away from private-label deals,” the investment bank found.
Second, there’s been a significant cut in leverage. The average loan-to-value (LTV) ratio was 51% for underlying loans post-SVB’s failure, down from the post-COVID average of 60%.
Third, investors continue to approach the market with extreme caution.
The share of commercial mortgage securities with office exposure is down 19% from an average of 32% over the past three years. This fall has been offset by an increase in loans with retail and industrial exposure, which have “firmer fundamentals,” the Goldman Sachs strategist found.
Bank lending conditions still ‘too early to infer any signal’
The nation’s largest banks suggested in their latest earnings results that they have been able to weather the turmoil within their industry. However, many regional lenders haven’t been hit with the same luck.
“As discussed by our economists, the read-through from management commentaries during the first quarter earnings suggests large banks have not materially tightened lending standards,” Karoui wrote. “That said, many regional banks report that they have already reduced their lending or plan to soon.”
An increasing share of banks reported tighter lending conditions during the last two weeks of March in the wake of several high-profile bank collapses, according to the Federal Reserve’s H.8 report.
Goldman Sachs economists have closely monitored this report that outlines the assets and liabilities of commercial banks to gauge credit lending conditions.
Separately, lenders were already making it tougher to get a loan for consumers and businesses in recent months amid the bank collapses, according to a Federal Reserve survey.
The Goldman analyst did note that much of the CRE lending tightening occurred over the three previous quarters, which had created wider spreads on loan rates, lower loan-to-value ratios, higher debt service coverage requirements, and shorter interest-only payment periods. Banks also have set aside larger reserves for CRE loan losses, especially for loans backed by office properties. But, somewhat optimistically, net charge-offs only ticked up slightly on those loans in the first quarter.
“Overall, the signal is somewhat encouraging but it is in early days yet, and more time is likely needed to get a clear signal,” Karoui wrote.
Still, banks with commercial real-estate loans secured by office buildings face difficult times as loans mature. Data from Trepp shows that in the month of April there was no change in the share of delinquent loans. However, on a yearly basis, office property loans were the segment that deteriorated the most.
“As we approach a wave of refinancing needs through 2023H2 and 2024 for both bank and CMBS loans, we continue to expect a material increase in CRE delinquency rates that could lead to a more front-loaded profile for losses vs. past cycles,” Karoui said.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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Source: https://finance.yahoo.com/news/commercial-real-estate-lending-is-tanking-with-one-metric-at-a-13-year-low-183310891.html