Englund

  For the first time since the great financial crisis, buyers of top-rated commercial mortgage-backed securities are suffering losses. 1407 Broadway was, as far as the financiers of Wall Street could tell, as rock-solid an asset as could possibly exist. Located in the heart of Manhattan’s storied Garment District, its entrance cut from white marble flecked with a soft bronze terrazzo motif, the 43-floor tower was a money-minting machine with a never-ending roster of well-heeled corporate tenants. https://www.1407broadway-ny.com/our-building So when the owners floated a $350 million bond backed by the building’s rental income in 2019, the bulk of the debt was stamped with a AAA credit rating, the highest grade awarded by ratings firms.  Not even US Treasury bonds, the North Star for global financial markets, are deemed that safe.  But 1407 Broadway, the thinking went, was so impervious to the vagaries of economic cycles that a default was unfathomable — nothing more than a...

  Building housed Goldman Sachs from late ‘60s to early ‘80s A minute’s stroll from the New York Stock Exchange Across the street, in those days, were the offices of Drexel Burnham Lambert, while up the road stood the grand homes for Bank of America Corp. and what was then J.P. Morgan & Co. Bloomberg 23 September 2024 https://www.bloomberg.com/news/features/2024-09-23/the-goldman-sachs-offices-converted-into-4000-luxury-rentals Taking the biggest hit: junk bonds, otherwise known on Wall Street as high-yield bonds, a major source of capital for many growing companies that pose a higher credit risk.  The proportion of junk bonds trading at distressed prices surged during the past month to the highest level since the early 1990s, when the market was paralyzed by recession and the collapse of Drexel Burnham Lambert.  Wall Street Journal 2000-10-18 https://www.internetional.se/shares.htm https://en.wikipedia.org/wiki/Drexel_Burnham_Lambert Treasury Secretary Henry Paulson ...

  Regional and mid-cap banks, like Silicon Valley Bank before them, are all part of a shifting and, in some cases, worrying global trend.  Interest-rate shocks, regulatory burdens and a yawning tech gap are disrupting lenders that have served as a bedrock for regional economies for centuries, threatening to cut off consumers and businesses from their traditional funding routes. In the US, where thousands of smaller banks seek to compete with trillion-dollar behemoths such as JPMorgan Chase, the decline of in-person banking and regulatory changes have eroded once-entrenched business models A risk assessment published by the European Banking Authority in June found that “several banks, mainly smaller in size, have CRE exposures that reach multiple times their equity, which makes them increasingly vulnerable to downturns in CRE markets.”  The authority defines smaller banks as those whose total assets are in the “double-digit euro-billion area,”  Bloomberg 4 September 2...

  A $557 Billion Drop in Office Values The Big Take Bloomberg  26 August 2024 https://www.bloomberg.com/news/features/2024-08-26/downtown-office-real-estate-suffers-as-new-neighborhoods-take-off Wells Fargo has long been one of the biggest players in the mortgage business Founded in 1988, Trimont is a specialized commercial real estate loan services provider that provides services to help lenders manage and grow their commercial real estate loans. The deal is expected to close in early 2025, pending certain conditions, and will result in Trimont managing over $715 billion in US and international commercial real estate loans.  CNN/Reuters August 20, 2024 https://edition.cnn.com/2024/08/20/economy/wells-fargo-sells-off-commercial-mortgages/index.html Trimont  https://trimont.com/emea/home/ Banks, Commercial Real Estate, Extend and Pretend https://englundmacro.blogspot.com/2024/08/banks-commercial-real-estate-extend-and.html

 Some bank stocks are the functional equivalent of ticking time bombs. That’s because many have significant holdings of commercial real estate (CRE) properties that, if valued at current market rates, would wipe out the banks’ net worth.  Many vulnerable banks have been able to avoid this fate—up until now—by conspiring with their mortgage lenders to engage in a practice known as “extend and pretend.”  This practice involves simply extending the original loans while pretending that the properties’ market prices haven’t plunged significantly. This practice will become increasingly difficult to pull off, however, as more CRE properties come up for sale and their true value is revealed for all to see.   Mark Hulbert MarketWatch 12 August 2024 https://www.marketwatch.com/story/banking-stocks-for-those-who-worry-about-a-banking-crisis-bfd39f9b The World’s Empty Office Buildings Have Become a Debt Time Bomb The ‘Extend and Pretend’ Real Estate Strategy Is Running Out of Ti...

 With stock markets plunging around the world, traders are talking up the prospect of an emergency interest-rate cut from the  Fed. Not only is this highly unlikely, it would be counterproductive. Swathes of investors have gotten over their skis on over-leveraged trades; from borrowing cheaply in low-interest rate Japanese yen to chasing the bubble in technology stocks, especially anything AI related.  The fabled "Fed put" is a break-glass lever only to be used in event of a proper emergency — and we're not there yet. The Fed's next meeting is on Sept. 18, and a 50 basis-point reduction is nearly fully priced in by the futures market. Marcus Ashworth Bloomberg 5 augusti 2024 at 11:49 CEST https://www.bloomberg.com/opinion/articles/2024-08-05/an-emergency-federal-reserve-rate-cut-would-be-a-mistake The term "Fed Pivot" refers to the Fed's change in monetary policy from raising rates to lowering rates. The Fed's pivot occurred in 2019, when it lowered ...

  Amundi is an owner of the Coeur Defense project in Paris. Photographer: Zula Rabikowska/Bloomberg An increasingly critical dilemma for open-ended property funds in Europe, investment vehicles that oversee some €166 billion in assets.  I n a world where office buildings are out of favor, one of the few ways to meet redemptions is to sell other, more attractive assets, such as residential buildings, warehouses or properties than can be transformed for such uses. Funds may soon have no choice but to sell office buildings -- triggering a wave of revaluations that threaten any market recovery. Open-ended property funds in Europe have seen six consecutive quarters of outflows, according to Morningstar Inc. The data showed investors have pulled more than €12 billion since the European Central Bank began raising interest rates in July 2022, leaving net assets at the lowest level in five years. Bloomberg 30 July 2024 https://www.bloomberg.com/news/articles/2024-07-30/europe-open-ende...

As a believer in efficient-ish markets, I am uncomfortable calling anything a bubble.  Recognizing a bubble requires spotting an asset or asset class that is objectively overvalued before everyone else does.  Making this determination is almost always impossible in real time, even if it’s screamingly obvious in hindsight.  Sometimes, however, you get an inkling that something isn’t right — and lately I am feeling that about private markets, especially private equity, even if there are no prices that can collapse or be inflated. In 2023, the value of North American private equity assets under management was estimated to be $3.5 trillion, more than 10 times what it was two decades earlier. The higher-forever rate environment poses an extra challenge, as the industry thrived and grew with rates near zero. Some parts of the private asset industry will weather higher rates, but others (commercial real estate, for example) may not be able to. Unlike public markets, when the pri...

  More Main Street funds — not just non-traded REITs — are putting up gates to limit withdrawals Queues have hit roughly 95% of the commercial real-estate industry’s benchmark “Odyssey” index, an equivalent to the S&P 500 index, according to a person with direct knowledge of the matter. MarketWatch 7 July 2024 https://www.marketwatch.com/story/the-rush-to-exit-commercial-real-estate-funds-is-going-mainstream-ae178260 So let’s extend and pretend https://englundmacro.blogspot.com/2024/07/still-messier-with-cre-loans-so-lets.html As we learned during the eurozone’s sovereign debt crisis, European politicians are able to kick the can down the road, but making decisive improvements is another matter altogether. John Authers Bloomberg 8 July 2024 https://englundmacro.blogspot.com/2024/07/det-franska-valresultatet.html

  The culprits are three-fold: the structural collapse of demand in the office market, floating-rate mortgages, and loan maturities amid higher interest rates. Loans are pulled off the delinquency list if the interest gets paid, or if the loan is resolved through a foreclosure sale with big losses for the CMBS holders, or if a deal gets worked out between landlord and the special servicer that represents the CMBS holders, such as the mortgage being restructured or modified and extended. This extend-and-pretend is now all the rage because CMBS holders do not want to end up with a half-empty decades-old office tower, which is the gun the landlord holds to the lender’s head. ---- What Is a Commercial Mortgage-Backed Security (CMBS)? https://www.investopedia.com/terms/c/cmbs.asp ---- And many landlords have already pulled the trigger over the past two years by walking away from the loan and the property, losing whatever equity they had in the building, and letting the lender take the r...

Expects more regional bank failures in the US because of a “very high” concentration of troubled commercial real estate loans on their books. “The real wave of distress is just starting” for lenders to everything from malls to offices, John Murray, Pimco’s head of global private commercial real estate team, said in an interview.  His division sits within Pimco’s $173 billion alternatives business.  The turmoil has been particularly felt among regional banks, which boosted their CRE exposure that in many cases is now worth only a fraction of their value at their peak.  Smaller banks have continued to worry investors ever since the collapse of a few last year.  Earlier this year, US Bancorp, the largest regional bank by assets, increased its provisions for credit losses in the first quarter to $553 million. Bloomberg 11 June 2024 https://www.bloomberg.com/news/articles/2024-06-11/pimco-warns-of-more-regional-bank-failures-on-commercial-property-pain Kontorsvakanserna i...

Too-big-to-fail banks are starting to react. The development marks a new frontier in how banks handle the risks in their loan books.  CRE portfolios, already battered by higher interest rates and volatile post-pandemic occupancy rates, are now emerging as a fresh headache for banks whose books are overloaded with old properties badly in need of investments to meet new green requirements. While the EU’s rollout of EPBD is likely to play out over several years, it’s already clear that buildings that fall behind risk turning into stranded assets that can no longer be sold or rented.  The EU estimates that about 85% of buildings in the bloc were built before 2000, with 75% of these having a “poor energy performance.” The EU estimates that buildings in the region guzzle more than 40% of the energy consumed, which makes their environmental risk hard for banks to ignore.  The bloc has set a goal of cutting greenhouse gas emissions in the building sector by 60% through 2030, and ...

  Prices tumbled 12% from its peak in 2022  RE: De verkar ha gamla vinster att ta av. Now, there’s evidence emerging that the market has bottomed.  Robert Burgess Bloomberg 28 maj 2024   Slow-Moving Property Crisis Means Averting a Greater One - Bloomberg

A giant commercial real-estate fund is scrambling to escape a looming cash crunch caused by the long line of investors who want their money back. The $10 billion fund from Starwood Capital Group has been trying to preserve its available cash and credit by limiting investor redemptions. In the first quarter, the fund was hit with $1.3 billion in withdrawal requests but satisfied less than $500 million of them These developments have left the Starwood Real Estate Income Trust, known as Sreit, with three options—none of them appealing.  It could take on more debt. It could sell properties into a tough market. Or it could halt completely or limit further redemptions, a move that would greatly impair the fund’s ability to raise new money.  Unless it takes one of these three steps, Sreit looks poised to run out of cash and credit before year-end  if the current pace of redemptions continues. Other real-estate funds are handling the pressure from the long queue of redemptions in...

Commercial real estate faces a ‘slow moving train wreck.’ The roughly $20 trillion U.S. commercial real-estate market has been facing a big liquidity crunch that looks to get worse if interest rates stay high as a deluge of debt comes due. Roughly half of the estimated $4.7 trillion of the debt on commercial buildings set to mature through 2027. Many of “these mortgages need to be extended  MarketWatch 30 April 2024 https://www.marketwatch.com/story/commercial-real-estate-faces-a-slow-moving-train-wreck-here-are-fixes-for-lawmakers-834c0eaa The World’s Empty Office Buildings Have Become a Debt Time Bomb Extend and Pretend https://englundmacro.blogspot.com/2023/06/the-worlds-empty-office-buildings-have.html

19 April 5 days   Banks Believe They Are Well-Prepared for Commercial Real Estate Fallout Wall Street Journal April 19, 2024  Fear and Greed Index - Investor Sentiment | CNN Geely säljer samtliga sina B-aktier i Volvo lastbilar.  14 miljarder kronor https://englundmacro.blogspot.com/2024/04/geely-saljer-samtliga-sina-b-aktier-i.html S&P 500 ended Thursday down for a fifth consecutive session. Nasdaq closed at a nearly two-month low. https://www.marketwatch.com/livecoverage/stock-market-today-dow-futures-lower-after-israel-launches-strike-against-iran Another Shock From the Middle East John Authers Bloomberg 19 april 2024 at 07:26 CEST https://www.bloomberg.com/opinion/articles/2024-04-19/israel-iran-another-mideast-shock-for-markets Det är inte säkert att Iran gör verklighet av hoten att svara  på det som förefaller vara en israelisk motattack på fredagsmorgonen. Carl Thulin DI 19 april 2024, 08:41 Bedömare: Chans att Iran inte svarar (di.se) Svenska sparare som ...

Luxury brands are racing to buy properties on the world’s most famous shopping streets.  One reason is the fear that, if they don’t buy their flagship store from the landlord, one of their rivals will do so and send them packing. Big luxury companies have spent more than $9 billion on real estate since the start of 2023. Wall Street Journal 6 april 2024 https://www.wsj.com/real-estate/commercial/luxury-brands-go-shopping-for-upmarket-boutiques-b05bb30a At €200 Billion, Hermes now worth more than twice the valuation of Airbus https://englundmacro.blogspot.com/2023/04/at-200-billion-hermes-surfs-luxury-boom.html

Office landlords, battered by a global crash, have been clinging to the hope that new buildings with strong green credentials will still demand top rents and prices. Dublin is emerging as a cautionary tale that such optimism may not hold up. In the city’s North Docks district, new buildings are falling into bankruptcy protection after US tech firms scaled back the amount of new space they leased and borrowing costs rose. Values are already down 40% to 50% from their peak, according to investors and brokers, who expect price declines and strains in financing to continue in coming months. The slump is playing out in an area best known a decade ago for the unfinished shell of a new headquarters for Anglo Irish Bank after its demise helped tank the economy during the financial crisis. It’s part of a wider global downturn that’s hit commercial real estate valuations from New York to London and Hong Kong, with implications for developers, investors, banks and other lenders. Bloomberg 9 April...

PBB, as it’s known, is heavily exposed to US commercial real estate and struggling to address a problem all too common among banks: Investors are worried that it might not have enough equity to absorb its potential losses.   Equity is the bedrock of the financial system, the capital that shareholders provide to make loans and to take the first hit if things go wrong. Without it, banks are insolvent. They lack the resources to pay depositors and other creditors. Yet PBB insists it’s still well capitalized — and by regulators’ preferred measures, it is. The bank reported a Common Equity Tier 1 Ratio of 15.7% as of Dec. 31, well above the regulatory minimum of 8.4%. How can a bank be so obviously in trouble while officially fine?  The answer is in the way regulators evaluate capital adequacy. Pretty much every failed bank in recent years had an excellent risk-weighted capital ratio right up to the end.  Silicon Valley Bank’s Common Equity Tier 1 ratio was 12% in Decembe...

  Many 2023 maturities were pushed into 2024, giving lenders more time for rates to drop  Banks’ expected 2024 commercial real-estate maturities rose 35% from previous estimates. They estimated that about 40% of banks’ CRE loans maturing this year are actually ones that were supposed to mature in 2023.  “increasing role for alternative lenders.” This would especially be the case if banks need to be more mindful of their capital and risk levels as new rules come into play. Wall Street Journal 4 April 2024 https://www.wsj.com/finance/banking/banks-are-extending-office-loans-are-they-also-pretending-f62ddd80 Gillian Tett: America’s commercial real estate - ‘pretend and extend’ need to end Gillian Tett 21 March 2024 https://englundmacro.blogspot.com/2024/04/gillian-tett-americas-commercial-real.html   Banks are selling risk to hedge funds, private-equity firms through so-called synthetic risk transfers Nov. 7, 2023   https://www.wsj.com/finance/banking/bank-syn...