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Any hopes that falling borrowing costs would stem the pain from the US office downturn were swept away this week.<\/p>\n
Deutsche Bank<\/a> AG\u00a0set aside more money<\/a>\u00a0for souring US commercial real estate loans, while a Blackstone<\/a> Inc. mortgage trust\u00a0slashed its dividend<\/a>. New York Community Bancorp\u2019s shares then plunged the most since the last bout of CRE-related turmoil in March after provisions for losses came in at more than double the average expected by analysts.<\/p>\n The announcements signal that lenders may not be able to just amend and extend loans in the hope that lower interest rates will ease borrowers\u2019 pain and give property owners more time to\u00a0refinance debt<\/a>. More than $94 billion of US commercial real estate is currently distressed, according to MSCI Real Assets, with a further $201 billion at risk of slipping into that category.<\/p>\n \u201cAs a $1.5 trillion wall of loan maturities hits over the next two years, the implications are profound,\u201d John Murray and Fran\u00e7ois Trausch at Pacific Investment Management Co.\u00a0wrote<\/a>\u00a0in a note this week. \u201cLenders and borrowers will be forced to \u2018face the music\u2019: In the near term, we expect further declines in appraised valuations and price indices, making loan extensions even more difficult to rationalize.\u201d<\/p>\n The bad news began when Deutsche Bank said the office sector in the US will continue to impact earnings in the coming months, although it expects CRE provisions to be lower in the second half. Later that day, Blackstone Mortgage Trust Inc., a target for short sellers, reported a quarterly loss to the trust of $61 million compared with a $101.7 million profit in the same period a year earlier. It cut its dividend by 24%.<\/p>\n The following day, New York Community Bancorp said it set aside another $390 million during the second quarter to cover loan losses, primarily due to office lending.<\/p>\n \u201cHigher impairments suggest asset revaluations may still be working their way through at lenders and others with real estate exposure,\u201d said Tolu Alamutu, a senior credit analyst at Bloomberg Intelligence, of the outlook for the industry. \u201cAs transaction volumes creep up, more adjustments can\u2019t be ruled out. These marks may pale in comparison to last year\u2019s but may still reverberate.\u201d<\/p>\n Credit investors remain comfortable that the turmoil from CRE will be contained, with risk premiums on bank bonds rising less than the broader market, showing they\u2019re outperforming.\u00a0<\/p>\n Private credit providers see an opportunity to profit as borrowers approach maturity walls. CRE debt funds are seeking to raise about $50 billion in capital over the near term, with some considering the purchase of impaired loan portfolios from banks, according to researcher Green Street.<\/p>\n Katie Keenan, Blackstone Mortgage Trust\u2019s chief executive officer, said in a statement, \u201cWith strong liquidity, accelerating repayments, and an emerging investment pipeline, BXMT is well positioned to deploy capital accretively in this environment and continue its forward trajectory through the cycle.\u201d<\/p>\n There are opportunities for investors in both senior and mezzanine debt, Murray and Trausch at Pimco wrote, though they cautioned that the CRE damage will be long lasting even if the Federal Reserve begins to loosen monetary policy.<\/p>\n Forward curves suggest borrowing costs will keep business property values 20% to 40% below their 2021 high, they said, adding that \u201cthe headwinds buffeting the commercial real estate market will result in a materially slower recovery than that seen after the global financial crisis.\u201d<\/p>\n<\/div>\nPrivate Credit<\/h3>\n
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