American commercial real estate crisis emerges! About US$155 billion may be in trouble, and discounted housing prices cannot keep up with land prices

American commercial real estate crisis emerges! About US$155 billion may be in trouble, and discounted housing prices cannot keep up with land prices

U.S. commercial real estate emerges from the golden age of ultra-cheap money.

　　A 20-story tower at 529 Fifth Avenue in New York City stands out from other buildings around Grand Central Station with its surreal pink design, which was inspired by Alice in Wonderland.

　　But for investors, the tower is not so striking for its looks as it is for being one of a handful of commercial buildings in New York that has changed hands recently, offering clues to the value of old Manhattan offices.

　　Three months ago, Silverstein Properties sold the old office building for $105 million, which on a per-square-foot basis was even less than what a piece of land across the same street was worth in 2015.

　　Blackstone recently sold a midtown Manhattan building for $320 million, a discount of one-third from 2006, and sold its stake in One Liberty Plaza in lower Manhattan to Brooke Field, the deal valued the tower at $1 billion, down from the $1.55 billion it valued when Blackstone bought its interest in 2017.

　　The towers’ plight reflects the emergence of a golden age of ultra-cheap money for U.S. commercial real estate, and a microcosm of a commercial real estate crisis that may be brewing in the U.S.

$64 billion in assets in trouble

　　A recent MSCI Real Assets report said distressed commercial real estate assets, or properties that were forced to sell because owners couldn’t pay their mortgages, surged 10% to about $64 billion in the first quarter. Another $155 billion in assets could be at risk of going bad, according to the agency. Commercial real estate mortgage delinquencies also rose to 3 percent in the first three months of the year, according to the Mortgage Bankers Association. “If this potential distress escalates into full-blown trouble, increased distressed asset sales and lower prices will be inevitable,” MSCI Real Assets researchers Jim Costello and Alexis Maltin said in the report. avoid.”

　　After the banking crisis earlier this year, commercial real estate could be the next sector to fall into crisis. Troubles in commercial real estate could also keep Bank of America volatile in the second half of the year, especially for smaller banks that finance about 60 percent of commercial real estate debt.

　　U.S. retail real estate, which includes malls, has seen the most stress, with nearly $23 billion worth of assets in trouble, according to a report by MSCI Real Assets. In addition, in view of the trend of home office and layoffs, office buildings are facing a larger wave of maturing debts, resulting in potential distress of nearly US$43 billion in assets, which is the sub-item with the greatest potential risk.

　　U.S. commercial real estate prices fell in the first quarter for the first time since 2011, dragged down by declines in multifamily and office prices in the first quarter, Moody’s data showed, underscoring the risk of more financial stress in the banking sector.

　　Moody’s chief economist Mark Zandi (Mark Zandi) said: “More price declines are coming”, which will exacerbate the difficulties faced by many banks. Mike Wilson, chief investment officer and chief U.S. equity strategist at Morgan Stanley, even warned that U.S. commercial real estate prices could plummet 40% from their peak levels, a decline worse than the 2008 global financial crisis.

　　Federal regulators are also now looking closely at banks’ exposure to commercial real estate lending. The Financial Stability Oversight Council, led by Yellen, met recently to discuss banking issues, focusing on the risks banks face in lending to commercial real estate. Those risks are centered on loans made by small banks for office buildings, she said, predicting that defaults on commercial real estate loans could lead to more bank failures. When Powell attended the hearing of the Senate Banking Committee last week, he also said that the Federal Reserve will cooperate with banks with high commercial real estate holdings to try to help such banks deal with the risk of commercial real estate concentration.

Selling at a discount, the house price is not worth the land price

　　Manhattan was the most active market for distressed commercial real estate sales, recording $2.6 billion in deals in the 12 months through May, or 19% of all U.S. deals, according to MSCI Real Assets. Many of these transactions were discounted sales by owners due to financial pressure.

　　”In New York, commercial buildings are selling for less than the land they sit on,” said Will Silverman, managing director of real estate investment bank Eastdil Secured. “In absolute dollar terms, they’re cheaper than they used to be. 20-year levels.”

　　Discount sales are not limited to New York, with some heavily indebted office building owners foreclosing in Houston and commercial property mortgages defaulting on hotels and shopping malls in San Francisco. Los Angeles trailed New York as the second most active market for distressed commercial real estate sales with $746 million in sales, according to MSCI Real Assets, with Houston in third.

　　In New York, the world’s largest office market, office buildings in the world’s largest office market have recently sold for a combined $76 billion discount to their previous purchase value, with 73 buildings currently worth less than Their loan balance, insolvency.

　　Scott Rechler, president of RXR, one of New York’s largest developers, likened the situation to “a hurricane making landfall.” “I’m not sure people have accepted how long the storm will last and how much damage it will cause,” he said. “For commercial real estate, I think the market is still underestimating the magnitude of the potential crisis.”

　　Asset manager CBRE IM warned that the financial toll from such forced sales may still not be fully felt, as commercial real estate transactions more than halved in the first quarter year-on-year, meaning many owners are still struggling. persist in.

　　But market participants generally believe that landlords, lenders such as banks have less flexibility to hold on to distressed properties until conditions improve. One broker estimates that only the top 10 percent of New York office buildings, both in terms of debt levels and occupancy rates, are not yet distressed, meaning, “the market is on the verge of forced sales.”

Even the Blackstone Group, which was once firmly optimistic about the US real estate market, recently stated that the proportion of traditional US office buildings in its global investment portfolio is less than 2%, which is significantly lower than the proportion of more than 60% in 2007, because the company “intended to to invest in other industries.

　　Discount sales are likely to accelerate as more homeowners are forced to refinance. Nearly $900 billion of U.S. commercial real estate debt is due this year and next, according to MSCI. If owners cannot refinance on reasonable terms, or are forced to infuse millions of dollars in new capital, their only option is to sell at a discount.

　　”The core problem in the commercial real estate market is that many of these assets were financed with short-term floating-rate debt a few years ago,” said Steven Stuart, general manager of global real estate at investment group Fortress Investment Group. Before any refinancing negotiations The future of offices, the largest commercial real estate segment, is full of uncertainty.”

　　Julie Ingersoll, chief investment officer of CB Richard Ellis, said: “The office is in the midst of a massive paradigm shift. We believe it will take more than five years to achieve a fundamental shift in demand. This is A real estate cycle like we haven’t seen before.”