John Murray told the media that as a lender in the commercial real estate field, regional banks in the United States are facing a "real wave of difficulties" that has only just begun. For banks, the decline in the value of mortgage assets may lead to an increase in the loan-to-value ratio, which is the ratio of the loan amount to the actual value of the collateral.
Asset management giant PIMCO predicts that more regional banks in the USA will fail, as commercial real estate loans are 'extremely concentrated' on these banks' balance sheets.
John Murray, Managing Director of PIMCO's global private commercial real estate team, told the media that regional banks in the US, as lenders in the commercial real estate (CRE) market, are facing a "real wave of problems". CRE refers to non-residential real estate, including office buildings, shopping centers, hotels and other commercial properties.
Murray explained that uncertainty over the Fed's rate cuts has intensified the challenges facing the CRE industry, with high borrowing costs suppressing valuations and triggering defaults, leaving regional banks saddled with hard-to-sell assets. He said large banks have been selling off high-quality assets, helping them avoid further losses.
He added that over the past 18 months, his team has been buying up CRE loans that major US banks have been shedding. 'However, as non-performing loans increase due to maturity, we expect banks to sell these more challenging loans to reduce their problem loan exposure.'
Regional banks are particularly sensitive to this turmoil. Earlier this year, New York Community Bancorp (NYCB) was reported to be seeking external capital to support its balance sheet, with issues related to commercial real estate crisis. The event was resolved with outside investors pumping in more than $1 billion.
For banks, the decline in the value of mortgage assets can lead to an increase in the 'loan-to-value ratio,' which is the ratio of the loan amount to the actual value of the collateral. In extreme cases, the loan amount may even exceed the market value of the mortgaged real estate, putting pressure on the banks' asset structure.
In March of this year, MSCI Real Estate Assets reported that regional banks were the only banks in recent years not requiring commercial real estate borrowers to pay additional down payments, highlighting their vulnerability in the face of falling asset valuations. Last week, Axos Financial Inc. was successfully 'sniped' by the short-selling firm Xingdeng Research due to this reason.
The MSCI Real Estate Assets report forecasts that banks will face about $441 billion of maturing real estate debt this year. Murray said that the CRE loans of larger banks have been restricted since the 2008 crisis and are unlikely to cause systemic bankruptcy due to real estate risk exposure.
At the same time, many mortgage-backed real estate investment trusts (REITs) are gradually being marginalized due to their own problems, limiting their ability to underwrite new investments. Last month, Starwood Real Estate Income Trust tightened restrictions on shareholder withdrawals to maintain liquidity and avoid asset sales, and withdrawals requests from Blackstone's $59 billion property trust have also increased.
Murray said the loan amount from major public mortgage REITs has fallen 70% from 2021 levels. 'From the perspective of both the capital markets and fundamentals, rising interest rates coupled with recession pressure pose a real challenge to commercial real estate.'