Will Defaults in Commercial Loans Lead to a More Dire Banking Environment?

The Weekly Recap

The Fed raised rates for the 10th straight time by another 25 bps, putting more pressure on regional banks leading to a warning from Bill Ackman as stocks keep falling due to contagion risk. Economists say the real estate market is experiencing a frustrating stalemate, Janet Yellen said the US could default in a month, US job openings fell for a third-straight month, short bets against commercial REIT's hit a post-Covid high, JP Morgan and Daddy Dimon acquired First Republic Bank as they now hold 16% of all US deposits, NYC airports hit record passenger traffic in Q1 and Geoff Hinton, the Godfather of AI, resigned from Google because we're getting too close to a reality dictated by Terminators. Happy Cinco De Mayo to all!

Will Defaults in Commercial Loans Lead to a More Dire Banking Environment?

With the recent banking failures of Silicon Valley Bank, Signature Bank and just recently First Republic, the conversation has evolved passed dealing with inflationary pressures and the threat of recession to the health and stability of community and regional banks. A major pressure point with the continuation of rising rates for these banks is that of some of the commercial loans that these banks hold. With vacancy rates of office buildings way below market norms, retail/restaurants still struggling and downtown areas of major cities seeing nominal pre-covid returns quantifying foot traffic through cellular data, a lot of owners are at risk of default, at the same time. Sound familiar?

Commercial property owners often borrow money from banks to finance the acquisition, development and management of their properties. If a large number of commercial property owners default on their loans at the same time, it can cause significant losses for banks leading to a decrease in their capital and liquidity potentially leading to insolvency and a banking collapse. With the above mentioned lists of issues, the talking heads of CNBC and Bloomberg as well as folks like Bill Ackman, stress that we are not out of the banking woods yet. A direct correlation can be drawn from the impact that rising rates have had on the banks that failed.

Government has proven time and time again that they will continue to bailout institutions that utilize risky behavior, with just recently having the FDIC insure ALL deposits of ANY amounts at the failed banks. Increased insurance can create a moral hazard. It's going to be quite the stress test over the coming weeks and months to see how institutions handle the added pressure. At the end of the day, especially in a world dictated by the likes of twitter, banking is a confidence game. If there is a crisis in confidence, you will see deposits be withdrawn and moved with a 'run on the banks'.

I believe institutions are resilient and we know they are WAY MORE capitalized now than in 2008 which will help stave off any cataclysmic events. Something to keep an eye on over the next few weeks for sure.

Market Performance

Here is how other asset classes performed as of this morning's opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market as well as newly signed contracts that have taken place over the last week.

Mortgage Rate Update

This week, mortgage rates inched down slightly amid recent volatility in the banking sector and commentary from the Federal Reserve on its policy outlook. Spring is typically the busiest season for the residential housing market and, despite rates hovering in the mid-six percent range, this year is no different. Interested homebuyers are acclimating to the current rate environment, but the lack of inventory remains a primary obstacle to affordability.

News You Can Use

• Federal Reserve Implements Quarter-Point Rate Rise and Signals Potential Pause Financial Times

• Yellen Breaks the Debt Ceiling Ice Axios

• Federal Reserve Chair Seeds Expectations for Pause in Interest Rate Rises Financial Times

• How JPMorgan's Dimon Wont the First Republic Deal Reuters

• US Homeowners Hold Near Record Equity Even After Price Declines Bloomberg

• The Regional Banking Crisis is Expanding Axios

• How Buyers Are Eager But Sellers Are Scarce New York Times

• JP Morgan Could Be Banking's Biggest Hero... Or Biggest Risk CNN

• Bill Ackman Warns US Regional Banking System Is at Risk Bloomberg

• US Money Market Funds Dee Biggest Weekly Inflow in Four Weeks Reuters

• US Could Run Out of Cash by June 1, Yellen Warns New York Times

• First Republic Becomes Second-Largest Ever US Bank Failure Bloomberg

• US Labor Market Softens As Job Opening Drop, Layoffs at Highest Level in Over Two Years Reuters

• US Weighs More Business Deposit Insurance After Banks Fail Bloomberg

• In Regulatory Tug of War, Banks Won... And Then Collapsed Axios

• Regional Banks Sunk as PacWest Weighs Strategic Options Bloomberg

• A Timeline of the Banking Crisis Failures New York Times

• The Market is Looking for the Next Domino to Fall, Keeping Banks Under Pressure CNBC

• Britain's Housing Slowdown Leaves More Homes on the Market Bloomberg

• NYC Airports Hit Record First-Quarter Passenger Traffic With 32 Million Travelers Bloomberg

The Deep Insight

Contact Me

Feel free to reach out to discuss more in-depth about your real estate goals, share your thoughts about my newsletter, or to share what you're experiencing in this market. Looking forward to hearing from you!