Silicon Valley Bank, Signature Bank collapse. Could more banks follow?
How is the government responding to the Silicon Valley Bank failure? Here’s what we know.
Just the FAQs, USA TODAY
In February, a PIMCO-owned office landlord defaulted on an adjustable rate mortgage on seven office buildings in California, New York and New Jersey when monthly payments rose due to high interest rates.
Brookfield, the largest office owner in downtown Los Angeles, that month chose to default on loans on two buildings rather than refinance the debt due to weak demand for office space.
They are a bellwether for what is likely to come, as more than half of the $2.9 trillion in commercial mortgages will be up for refinancing in the next couple of years, according to Morgan Stanley.
“Even if current rates stay where they are, new lending rates are likely to be 3.5 to 4.5 percentage points higher than they are for many of CRE’s existing mortgages,” wrote Morgan Stanley Chief Investment Officer Lisa Shalett, in a recent report.
Even before the collapse of Silicon Valley Bank and Signature Bank in March, the commercial real estate market was dealing with a host of challenges including dwindling demand for office space brought on remote work, increased maintenance costs and climbing interest rates.
With small- and medium-size banks accounting for 80% of commercial real estate lending, the situationmight soon get worse, says experts.
Commercial property prices could fall as much as 40% “rivaling the decline during the 2008 financial crisis,” forecast Morgan Stanley analysts.
“These kinds of challenges can hurt not only the real estate industry, but also entire business communities related to it,” says Shalett.
Is all commercial real estate in trouble?
Commercial real estate includes office buildings, shopping centers, multi-family apartments, hotels and data centers.
“It’s a wide bucket of assets,” says Mark Grinis, EY Americas Real Estate, Hospitality & Construction leader. “If you go to our data centers or in our industrial buildings that are powering e-commerce, they’re doing quite well. If you go into the multi-family business, rents maybe softening a little bit, but there’s still an undersupply of housing. The elephant in the room is office space, that’s going through a transformative shift.”
When it comes to office loans, since 2021, 44% more by volume were in delinquency and 55% more were in special servicing, according to Trepp, a provider of data and insights on commercial real estate.
“Storm clouds are absolutely building,” says Grinis.
Private equity to the rescue of office buildings?
In the short term, poorly structured, capitalized and financed buildings are probably either undergo some sort of change of ownership or go through foreclosure, says Grinis.
“You’re gonna see some eggs broken as these things (mortgages) mature and come due,” says Grinis. “And they either have to find somebody that’ll give them additional equity capital, they have to get their lender to be flexible or it will go back to the bank.”
When the price is right, expect private capital to step in.
“It’s a publicly traded security and a lot of people are looking at some of these office stocks and saying, ‘God, these are a pretty good buy,” so private equity will, at some point when the price is right, be there.”
Perspective from a real estate firm
Kip Sowden, CEO of Dallas-based RREAF Holdings, a private real estate investment firm with $5 billion in assets under management, says he’s seen business shrink due to tighter lending requirements.
The company, which operates in 14 states, develops multi-family dwellings, beachfront resorts, large residential communities, extended stay hotels and is in the process of developing RV parks.
In 2022, the company exceeded $1.5 billion in deal volume, up from $1.3 billion in 2021, he said.
“And in 2023, we think those numbers will likely be cut in half because of higher interest rates and just contraction in the number of deals financial institutions will look to fund.”
Sowden, who borrows from regional banks, says underwriting requirements have become very stringent.
“ A lot more equity is necessary to transact than before,” he said.
Office-to-residential conversions are top of mind
Office –to–residential conversions have been a hot topic of discussion ever since the pandemic emptied out office buildings.
State and local officials can help developers stuck with languishing properties while addressing affordable housing challenges in cities by fast-tracking zoning changes required for these conversions, say experts.
“Cities like New York and San Francisco are jewels of urban landscape and nobody benefits when these urban centers suffer,” says Grinis. “And so, there’s a call to action with respect to governments, private capital and then to maybe to some extent, regulators and legislators to ensure that the vibrancy of cities continue.”
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
