While Wall Street has hit record highs on the prospect of a 2024 interest rate cut by the Federal Reserve, at least three major sectors of the U.S. economy with important connections to the financial system, and possibly even These sectors have been hit hard. Interest rate increases occurring after March 2022.
According to data from the Mortgage Bankers Association, financial times (FT) says, “Hundreds of large office buildings in the United States will have billions of dollars in debt coming due this year, and their owners will likely struggle to refinance at current interest rates.” .”
There are $117 billion worth of office-based mortgages that need to be paid off or refinanced this year. Many of the mortgages owed interest rates to ultra-low levels after the 2008 financial crisis and the 2020 crisis when the coronavirus hit, as the quantitative easing police went after the Fed and other central banks for almost a decade and a half. It was borrowed when it was available.
The FT report cited comments from a leading real estate finance lawyer that some refinances would be difficult to complete.
“We’re seeing transactions where even sophisticated borrowers call it quits and ask their lenders if they want to take over the keys,” he said.
The commercial real estate sector has already been hit by a shock in December with the collapse of Austria’s Cigna, which is currently putting half of the Chrysler Building in New York up for sale to raise cash. There is.
Cigna’s owner, billionaire René Bancot, has amassed what has been characterized as a “financial time bomb”, gobbling up “cheap financing from the left, right and center,” according to one account. However, his activities were just one of the more extreme examples. broader process.
Last November, industry tracker BankRegDate reported that commercial real estate loan delinquencies had reached a 10-year high in interest rates. This is a result of rising interest rates and a decline in demand for office space due to increased remote work due to the financial crisis. Pandemic.
The amount of loans on which property owners missed multiple payments jumped 30%, or $4 billion, in the September quarter, and has increased by $10 billion over the past year.
BankRegData’s Bill Moreland told the FT that commercial real estate lending is “getting ugly fast” and delinquencies are expected to continue.
Big banks have the resources to weather the storm, at least for now, but much of the lending in the U.S. is done by small regional banks. They are already feeling the effects of rising interest rates as the value of government bonds in which they parked their cash has fallen because they were “safe” securities.
The situation led to the collapse of three banks in March, but the problem has spread across the board, with many banks “underwater” with total liabilities exceeding book value of assets.
The FT reported last month that “A group of U.S. economists found that 40% of office loans on banks’ balance sheets were underwater, potentially causing problems for the dozens of local banks that hold office loans.” I discovered it.”
Commercial real estate issues are long-standing. In April, Bloomberg reported that a “wall” of commercial and real estate debt worth about $1.5 trillion would come due by the end of 2025. The big question facing these borrowers was, “Who will refinance?”
A memo from Morgan Stanley analysts at the time estimated that the valuation of office and commercial properties could fall by up to 40% from peak to trough, increasing the risk of default, and refinancing. He said that risk was the most important issue. The situation has not gotten better since then, and as the Bloomberg report pointed out, it will continue to get worse.
It’s not just small and medium-sized banks and regional banks that will be affected. There are similar problems in the high-end financial sector and commercial real estate.
Earlier this week, wall street journal Non-traded real estate investment trusts (REITS), one of Wall Street’s “most popular funding giants” that allowed investors to participate in the 2019-2022 real estate boom, went into “orbital mode” last year. “I no longer ride the train.”
Fund redemptions soared last year as investors sought to cash out, sometimes forcing trusts to introduce rules that limit the rate at which people can get their money back.
Non-traded REITs raised $9.8 billion in the year to November, compared to $33.2 billion in 2022, as investors withdrew $17.4 billion.
The article said that although the pace of redemptions slowed to some extent towards the end of last year, outflows are expected to exceed funding in 2024, putting the business on the brink of the “worst recession to hit the commercial real estate industry.” It has become a symbol of Second World War. “
Article new york times Late last year, it was announced that the building boom that had reshaped Manhattan’s skyline over the past 25 years was over.
“Rising construction costs and interest rates are driving construction prices up significantly. Office vacancies are at record levels in Manhattan, while banks are becoming increasingly reluctant to finance such construction. “There are,” the paper said.
Office developers were faced with a one-two punch. First, the decline in demand due to the coronavirus, and the soaring interest rates have become “kryptonite for an industry built on debt.”
As of the end of November, about 18 percent of all office space in Manhattan was available for rent, much of it in older buildings built after World War II.
The average asking rent for office space in Manhattan is $75 per square foot. But rising construction costs, interest rates, and interest rates mean developers for new buildings must charge $200 to $300 per square foot.
These numbers, combined with growing commercial real estate problems across the country, signal that a financial reckoning is coming to an end after the economic boom of the past quarter-century, based in part on record-low interest rates.