Weekly Business Insights from Top Ten Business Magazines | Week 302 | Shaping | 2

Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 302 | June 23-29, 2023.

The ‘Extend and Pretend’ Real Estate Strategy Is Running Out of Time

By Patrick Clark | Bloomberg Businessweek | June 23, 2023

Listen to the Extractive Summary of the Article

The high chieftains of real estate finance flocked to the Marriott Marquis in New York’s Times Square in June at a precarious moment for their business. Commercial property transactions were stalled, squelching demand for new loans. 

Faced with delinquent loan payments, lenders decided to be patient: Instead of foreclosing on properties whose value was plummeting, they lengthened loan terms and ignored short-term valuations. They called it “extend and pretend,” and it worked so well that when Covid-19 brought the global economy to a halt in March 2020, they turned to it again. A rolling loan, they said, gathers no loss.

Yet in some quarters there are growing fears that this strategy might not work this time. The rapid increase in interest rates over the past year sucked air out of inflated valuations. As a result, landlords need to come up with more cash to offset the lower building value when they refinance their debt. At the same time, banks and insurers are under scrutiny from regulators and ratings companies over their real estate lending. And the pandemic accelerated changes to how people use offices, with uncertain implications for everything from downtown lunch spots to the tax revenue of major cities.

There’s about $20 trillion worth of commercial property in the US, including offices, rental housing, warehouses and retail spaces. The crisis will affect each category differently.  Commercial real estate values could fall 30% or more from peak to trough.  Falling values are only part of the problem. About $1.3 trillion worth of commercial real estate loans will come due by the end of 2025. Most borrowers will need new loans to pay off their old ones, and lenders are being much more careful than they were a few years ago. In the worst-case scenario, borrowers can’t refinance, banks report losses and—in a repeat of what happened at Silicon Valley Bank and First Republic in the spring—nervous depositors start pulling their money out, sending banks to the edge.

The US economy is strong, with consumers keeping demand high for rental housing and e-commerce warehouses. Some nonbank lenders are finding that not only can they impose higher interest rates, but they can also be choosy about which properties they back. Other investors are planning to profit by scooping up distressed properties at cheap prices.  But skill alone won’t be enough to work through the biggest issue facing commercial real estate today: the strain on banks. 

3 key takeaways from the article

1. The high chieftains of real estate finance flocked to the Marriott Marquis in New York’s Times Square in June at a precarious moment for their business. Commercial property transactions were stalled, squelching demand for new loans.
2. Faced with delinquent loan payments, lenders decided to be patient: Instead of foreclosing on properties whose value was plummeting, they lengthened loan terms and ignored short-term valuations – a strategy worked well when Covid-19 brought the global economy to a halt in March 2020. 
3. Yet in some quarters there are growing fears that this strategy might not work this time. The rapid increase in interest rates over the past year sucked air out of inflated valuations. At the same time, banks and insurers are under scrutiny from regulators and ratings companies over their real estate lending. And the pandemic accelerated changes to how people use offices, with uncertain implications for everything from downtown lunch spots to the tax revenue of major cities.

Full Article

(Copyright)

Topics:  Real Estate, Global Economy, Inflation, Interest Rate