NEW YORK CITY-The impact of Moody’s massive and greatly-anticipated downgrades on 15 major banks has the majority of the commercial real estate industry feeling unfazed after US stocks and financial institutions rallied as of market close on Friday. But sources tell GlobeSt.com that while the credit cuts should not impact commercial real estate financing, larger concerns—such as job growth, global volatility and economic uncertainty—have the potential to cause a slowdown in leasing and sales across all property types.
“The banks impacted by the downgrades will still have to compete with other providers of capital to the sector,” Patrick Crandall, a senior managing director in the Los Angeles office of Cushman & Wakefield, tells GlobeSt.com. “It may cause the affected banks to be more selective about the deals they pursue to hold on their balance sheets, but I think they were already fairly selective on those deals. The bigger issue facing commercial real estate is the continuing slow global recovery, uncertainty over Europe and the Middle East, and lackluster job growth at home. It’s hard for lenders of any variety to get aggressive when they are not confident about the direction of the overall economy.”
The ratings action was the result of a previously announced review in February by Moody’s to reassess the volatility and risks that creditors of firms with global capital markets face. But Bill Hughes, senior vice president and managing director Marcus & Millichap Capital Corp., says the news of the downgrade is more “ho-hum” than anything else.
“It was expected, the other agencies have been after the banks for a while,” he says. “I think it’s just that there are a lot of market jitters out there, but there is a lot more to worry about than this, such as the economies of Europe in a technical recession, the domestic economy continues to cool off, and we’re plagued with not enough jobs to turn things around. We’re just so tired of bad news, and we think that whenever there is a downgrade, that the cost of debt is going to go up. In reality, it doesn’t have any impact. Most of the banks are healthy, and they’re still going to provide loans. Even with the downgrade, the banks’ balance sheets are better than they were a year ago, they’re making more money and the spread on the cost of dollars is as good as it has been for a long time.”
Joel Ross, a principal with New York City-based Citadel Realty Advisors, says that it’s telling that stock prices actually went up in Friday’s trading after dropping to a two-week low on Thursday afternoon. He says it’s clear that investors are paying far less attention to the ratings agencies than before.
“They’ve lost a lot of credibility, especially after they completely missed the collapse,” Ross says. “If it weren’t for the rules that pension funds and others have to deal in rated, investment-grade paper, the rules that need AAA or whatever, people would almost completely ignore what they say today. Major investors today are smart enough to do their own analysis, the rating is just one minor part of it.”
According to Matthew Anderson, managing director at Trepp LLC, the major US banks downgraded by Moody's – including Bank of America, Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley – do indeed have higher-than-average foreign loan exposures, at approximately 20% of total loans, as compared with slightly under 4% of foreign loan exposure for the US banking system overall.
“But loans are a smaller portion of the major banks' balance sheets than for regional and community banks,” he tells GlobeSt.com in an e-mail. “For major banks, loans are approximately 30% of total assets, as compared with 52% for the US banking system overall. Moreover, the large banks have hedged at least some of their exposure to foreign loans and foreign credit risk, so the total exposure would be somewhat mitigated by hedging.”
The Moody's downgrade also referenced residential loan exposure, which is indeed still a sore spot, and a significant exposure for large banks, Anderson writes. The delinquency rate for bank-held single family mortgages stood at 12.2% in first quarter 2012, down only modestly from the 14% peak two years ago in Q1 2010.
“Concerns about the broader health of the US economy - rather than Europe and single family residential specifically - would seem to be the larger worry,” he says. “Employment growth has slowed recently and other economic indicators have also softened. But a less-healthy US economy will impact the entire financial sector, not just the big banks.”
Overall, Guy Johnson, CEO of Irvine, CA-based Johnson Capital, a commercial real estate investment banking firm, says the banks still have record low cost-of-funds having the advantage of insured deposits, corresponding with historic low interest rates providing a great spread business—even with the downgrades. “The downgrades will help those large banks that are already deemed to be too big too fail who enjoy that reputation as compared to those that were downgraded and barely bumping along investment grade status,” he says.
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