Office Real Estate is not Contained.

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Office Real Estate is not Contained

We know that multi-family delinquencies are increasing. We are learning that the zero and negative interest rate regimes instigated a global hunt for yield, which found its way into US office assets. Foreign banks went outside of their mainstream businesses to lend into the US office market.

Regional US banks, by far the largest lender to commercial real estate, are tightening their lending standards at the very same time a wall of debt maturity is hitting the market. Regional banks have around $2 trillion of commercial real estate exposure.

An office building in Portland Oregon sold at an 85% discount to its prior sales price. A Canadian pension fund sold its 26% interest in a New York City office building for $1. Gillian Tett reported in the Financial Times last week that Canadian insurer Manulife has written down its US office exposures by 40%.

While loan extensions have been implemented in many loan maturities in recent months, borrowers are disincentivized to roll loans over when the equity is worth considerably less than the debt.

So, what does this mean for a lack of containment within office real estate?

Listed markets always lead private or unlisted markets in terms of valuations, meaning unlisted write-downs are still to follow, especially within the non-bank sector. Audit firms, being mindful of the potential for class actions, will increasingly pressure asset owners to review their valuations.

Extend and pretend is no longer possible.