Commercial Real Estate: How Does the Market Clear?
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“We have a problem in real estate. In every sector of real estate, not just office, because of the 500 basis point increase in rates that was vertical.
The office market has an existential crisis right now... it's a $3 trillion dollar asset class that's probably worth $1.8 trillion [now]. There's $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is...
There are buildings in New York that were bought for $200 million... the loan was $100 million... and we [personally] thought it was worth $30 million. There's a building for sale right now in San Francisco.
It was bought for $850 per sq ft. The loan was $450 per sq ft. They'll [probably] sell it for $250 per sq ft... that's $0.25 on the dollar. That would mean we lost three-quarters of the total asset class...”
Barry Sternlicht
“14% of all commercial real estate (CRE) loans and 44% of office building loans are now in "negative equity." In other words, the debt is now greater than the property value on all of these properties. Currently, US banks hold over $2.9 trillion of CRE debt, the majority of which is held by regional banks. Office building prices are down 40% from their highs and CRE as a whole is down over 20%. All as rates rise and many of these loans are due to be refinanced. CRE is beyond bear market territory.”
Kobeissi Letter
The reporting last week of New York Community Bank again brought to the surface the issue of how long it can take a distressed market to clear. The Savings and Loans crisis of the 1980s took many, many years to clear.
NYCBs announcement of credit loss provisions of around $550 million, against forecasts of $50 million and cutting of its dividend by 70% to preserve statutory capital, saw its share price decline by over 45% in two days.
Japanese bank Aozora quickly followed suit and announced non-performing loans of $719 million, which comprised 38% of its US office exposure which totals $1.9 billion.
While multi-family dwellings are showing increasing signs of impairment, it is the office space sector which is under the most pressure. Higher vacancy rates due to work from home policies, coupled with increasing sales data showing some buildings in the major cities selling for a fraction of the precious sale price which in many cases was more than ten years ago.
One recent example was the Xerox building in Washington DC, which sold for $25 million. It was last purchased for $145 million just over a decade ago, in 2011, crystallizing a loss of 83%.
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