Downward angle icon Downward angle icon. pimco Thomson Reuters “The real wave of commercial real estate mortgage crisis is just beginning,” Pimco's John Murray told Bloomberg. He warned that a surge in bank failures could come as a result of high exposure to commercial real estate loans. Big bank and nonbank debt funds are also areas to watch.
John Murray, global head of real estate at Pimco, told Bloomberg that the “very high” concentrations of bad commercial real estate loans would set off a new cascade of bank failures.
“The real hardship is just beginning,” Murray said.
Since interest rates spiked two years ago, commercial real estate has come into sharp focus as doubts grow about property owners' ability to refinance their debt.
Rising borrowing costs and weak demand have led to rising defaults across industries, especially in office buildings struggling with the rise of remote work.
This week, Fitch Ratings revised its office delinquency forecasts upward to 8.4% and 11% in 2024 and 2025, respectively.
The sector's main lenders are mid-sized regional banks, and Wall Street is growing concerned about the impact. Regional banks that have entered the real estate industry have seen their assets fall from their highs to a fraction of what they were, according to Bloomberg.
“But as non-performing loans increase as they approach maturity, we expect banks will start selling these more problematic loans to reduce their exposure to bad loans,” Murray said, adding that Pimco is buying more bonds that other financial institutions are selling.
The market's woes are already evident: Axxos Financial Inc.'s shares fell 15% earlier this month as short sellers targeted the bank's commercial real estate loans. New York Community Bancorp Inc. plunged in February after an unexpected quarterly loss was tied in part to its exposure to the real estate market.
Meanwhile, big dealers benefit from some protections because regulations since 2008 have limited their CRE lending capacity, Murray told Bloomberg. But even with the guardrails in place, big lenders are exiting the industry amid rising defaults, he noted.
At the same time, recent research suggests that large banks may be more exposed to the risk of a potential financial collapse than is commonly thought, given their indirect lending to real estate investment trusts through credit lines. As real estate investment trust investors rapidly withdraw, these funds are also reeling from the pressures of the real estate sector.
Murray added that non-bank Treasury funds, which are responsible for more than $200 billion in loans maturing next year, are also a problem.