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It's been more than a year since the collapse of Silicon Valley Bank, the ensuing turmoil in the U.S. banking industry, and the rise of fears about commercial real estate from a healthy boil to a full-blown boil. What's happening?
Alex Skaggs has been writing about this issue a lot before she went on maternity leave, and while she's gone we decided to read Goldman's latest report on the subject, which summarises simply: “volatile, dispersed, but not systemic.” Hmmm.
Overall, debt capital remains available for borrowers who can tolerate more restrictive and costly financing options. Refinancing needs have also been partially addressed through loan modifications, a trend that is likely to continue.
From a credit performance perspective, the percentage of loans that are late on payments or are being processed by lenders is increasing, but this increase has not yet translated into higher losses in the loan portfolio, muting system-wide concerns.
Finally, excluding office properties, property performance has generally remained strong, although variance between and within property types has widened. With the exception of apartments, we believe newer, higher quality properties will continue to outperform older properties. Additionally, historically low levels of construction starts bode well for longer-term rental growth in apartments and industrial properties, although some regional oversupply will continue to weigh on near-term net operating income.
A study done by Goldman analysts based on data from the Mortgage Bankers Association (looking at who is lending to CRE) is quite interesting.
There were widespread fears that the collapse of SVB and the ensuing turmoil in the U.S. banking world would lead to massive job cuts, but those fears have proven largely unfounded. U.S. banks have slowed lending to commercial real estate, but loan volumes have not declined. At the same time, non-bank lenders, who many expected to benefit from the turmoil, have retreated.
The nonbank contraction is likely due to mortgage REITs, which have been hit by wider spreads. Even more surprising, bank CRE lending growth has been driven by smaller banks, with Goldman analysts noting that the 25 largest U.S. lenders shrank their nonresidential commercial mortgage and multifamily mortgage balances by 4% and 1%, respectively, year over year.
In contrast, smaller banks saw nonresidential and multifamily mortgage balances grow by 5% and 10%, respectively.Interestingly, while large bank loan growth has slowed, the Federal Reserve's most recent Senior Loan Officer Survey indicates that a higher percentage of small banks are tightening their lending standards than large banks.This puzzle may be explained by the exit of very small banks (less than $100 million in assets), consistent with holdings data from the FDIC Call Report.
In any case, Goldman Sachs was kind enough to release the full report, which you can read in full here.