JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said concerns about a “domino effect” in the commercial real estate sector are overblown and that a surge in defaults is simply a reversion to the mean, in contrast to many of his billionaire colleagues who have been sounding the alarm about what one of them called a “very ugly market.”
Commercial property owners are struggling to hang on as a rise in remote work pushes vacancy rates to record highs and accelerates the expiration of 10-year office loans signed in the aftermath of the Great Recession, leading observers to draw comparisons to the 2008 housing collapse that shocked economies around the world.
In New York City and other major metropolitan areas, economists have warned of an “urban doom loop.” Falling commercial property values could reduce city tax revenues, leading to cuts to key social services and causing commercial property values to plummet even further. And the relatively high exposure of small regional banks to commercial real estate has raised concerns that the financial system could be structurally weaker if the beleaguered real estate industry causes another bank default.
But the elder Wall Street CEO, speaking to CNBC at JPMorgan's Global High Yield & Leveraged Finance Conference in Miami Beach on Monday, downplayed concerns about the sector.
“Commercial [property sector] From the consumer perspective [housing market,]”The consumer market is much larger. So what happened in 2007 and 2008 is not that. And a lot of these [commercial] Pet owners can deal with what is known as “stress.”
Zillow estimates that the national residential market is worth $43.4 trillion in 2022, more than double the size of the commercial sector's $20.7 trillion, according to a 2021 NareIt report.
But Dimon said a commercial real estate downturn could have a bigger impact if a major recession like 2008 actually occurs, as it could stop property owners from cash flowing and trigger a wave of defaults.
“If there's a recession, it would certainly make things worse. If there isn't a recession, I think most people would be able to get by somehow, either by refinancing or by increasing their equity,” Dimon said.
Dimon has been cautious about predicting a recession himself. He surprised investors in 2022 by warning of an economic “hurricane” caused by rising interest rates, but has since softened his stance. Last November, he warned that rising rates “could” lead to a recession, and yesterday he was cautious in saying the economy was “in good shape so far”, but added that “the market could change its mind quickly”. (Meanwhile, staff economists at JPMorgan Chase predicted no recession in 2024 in the bank's annual outlook report released last month.)
Defaults are already alarmingly high — a whopping 44% of commercial real estate is currently worth less than owners’ outstanding debt, according to a 2023 NBER paper — but Dimon said investors concerned about the rise should take the long view and consider the wave of defaults coming on the back of years of low-to-zero interest rates, when owners had easy access to cheap cash and were well protected from loan defaults.
“Any talk about default rates rising is in part just a normalization process,” Dimon said. “Default rates have been very low for a long time. They're rising, but they're not at crisis levels. [back] “Back to normal.”
Industry watchers share concerns about the commercial real estate market's shaky financial backing. Banks hold about half of the $6 trillion in U.S. commercial real estate debt, but of that half, 70% is held by small regional banks, which may lack the capital to weather a major market downturn, says Steen Van Neuwerburg, an economics professor at Columbia University.
New York Community Bank's shares, for example, plummeted by nearly two-thirds earlier this month on investor concerns about the commercial real estate portfolio it acquired when it bought Signature Bank, which collapsed last year. Other regional banks around the country have similar exposure. But Mr. Dimon said the impact on banks with large commercial real estate portfolios would be isolated, rather than structural, if the overall economy stabilizes.
“As long as the economy remains the same, [it] “It's going to be a bit of a whack-a-mole game. There's not going to be a domino effect,” Dimon said.
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