Are these the makings of another GFC? Or has the banking sector stabilized?
Turmoil in the banking sector amid rising interest rates has yielded concern among investors over the changed dynamics’ impact on the economy in general and commercial real estate in particular. Officials from the world’s largest commercial real estate services and investments firm recently staged a presentation to address the potential implications of banking turmoil for CRE.
The presentation by CBRE featured analysis from Kelli Carhart (pictured left), the firm’s executive managing director; Thomas Traynor, vice chairman, co-head of US large loans; and Richard Barkham (pictured right), global chief economist.
“There is a lot of exposure to government securities, which have fallen in value,” Barkham said. “The Fed’s support should offset that liquidity value but it is still there. The focus sharpened up on the regional banks and their exposure to real estate. We know there are falling values in the real estate market – somewhere between 15% and 20% or 25% – maybe more in the office sector. However, we have to remember the majority of those assets – even though they have fallen in value – will still generate income and therefore be able to service their loans.”
What is the office outlook for 2023?
He cited a previous CBRE study focusing on the CRE sector: “We’ve looked at the office sector, which is the focus in scrutiny,” he said. “Eighty percent (80%) of the rise in vacancy is due to the 10% of worst-affected buildings, so there are 90% of buildings still fully capable of generating income so those loans could be serviced. I’m not saying there won’t be defaults in the banking sector – there may even be up to 30% or 40% defaults in the office sector. But the actual losses that will flow through those defaults are much smaller and, probably at this stage, as far as we can tell, unlikely to disturb the capital of those banks – even though they may impinge on earnings. And the unwinding of those situations, or the management of those situations, will stretch over the next two to three years. It’s not ‘all is well’ for the banking sector, but it’s not a great financial crisis.”
Still, he offered a disclaimer of sorts: “We’re not completely out of the woods, despite the recent stability,” he said “It could be that we see more bank failures, and it could be that we see some turbulence in the non-bank sector. But I think we’ve got a view of the situation in the banking system, and also we’ve got the very powerful tools that have been deployed by the central bank, the Treasury and the FDIC to stabilize the situation.”
What is the status of Freddie Mac and Fannie Mae?
Carhart spoke about the status of Freddie Mac and Fannie Mae amid the volatility: “The agencies have a significant impact on liquidity and multifamily,” she began. “While many lenders were pencils-down with volatilities, the agencies were extremely active – they rate-locked almost $2 billion in business the week following the collapse of SVB [Silicon Valley Bank]. They’ve seen a significant uptick in new loan requests and approvals, primarily because rates, coupons, were in the low to mid 5s. As far as volatility and spreads, we have some of that on the agencies’ side, but that’s just due to softened demand on the bond side. Spreads are up almost 35 basis points in the last two weeks. They’ve settled down; we’re almost 15 basis points higher than we were prior to the SVB collapse.”
California-based SVB was shut down last month after its investments precipitously decreased in value, prompting depositors to withdraw their funds en masse. First Citizens Bank subsequently bought the failed bank’s deposits and loans. The collapse of SVB was the largest bank failure since Washington Mutual closed during the Great Recession in 2008, according to Investopedia.
Do banks have a liquidity problem?
Traynor addressed the state of the large loan space: “It’s held up,” he said. “There’s no question we hit a major pocket of turbulence and that was jarring and unsettling. The government intervention was so fast and furious that it seems to have nipped any serious contagion at this point. Banks seem to be in pretty good shape. I’ve talked to many regional banks in the past week, and they’re saying all the right things: They’re well-capitalized, deposits have held up, they’re open for business – relatively all good news. I think everyone is proceeding cautiously, but I’d say from a spread perspective, at least in the last few weeks, it’s not too serious – I’d say in the order of 25% basis points wider. There’s composure out there.”
Asked if there was still liquidity in the market, he responded without hesitation: “There is, there is. Absolutely.”
