Media Hyping Potential for CRE Loans to Collapse Banks, Expert Says
Adjustable-rate loans and those made from mid-2020 to mid-2022 are susceptible to default.
Marcus & Millichap is advising commercial real estate investors to not get caught up in the many overly dramatic, negative, and false headlines they are seeing in relation to Silicon Valley Bank and the potential for CRE to go down with it and similar banks.
John Chang, senior vice president, national director research and advisory services, speaking in a Marcus & Millichap video, said much of the news lately has been misrepresented and even false.
Many stories have suggested that small and regional banks hold 70% of CRE debt.
“But this calculation is misguided, he said, as it classifies this group as any bank not in the top 25 overall, globally,” Chang said.
He said there are 4,476 such “small” banks, and when considering that, it’s not a “doom loop” as some would suggest.
Chang said smaller and regional banks hold roughly 20% when you consider the average over the past eight years. He acknowledged that yes, some loans will default, but most won’t.
He said it’s important to consider when the loan was written, when it will mature, and how much equity was involved.
He said many loans that could come due in 2023 were written with conservative underwriting and at a 65% loan-to-value (LTV) ratio.
“That means the property’s value must fall by 35% to be in trouble,” he said. “When you look at the loans written five years ago, the properties’ value has risen about 25%, on average, and is probably worth more than what it was when it was purchased.”
He said that office is one sector that is more susceptible, given the behavioral changes in workers such as remote and hybrid employment.
“You might see loans default, but you won’t see the bank fail along with it,” Chang said.
Chang added that loans with adjustable-rate mortgages are also more susceptible to default if they were made between the second half of 2020 and the first half of 2022 when cap rates were low, and underwriting was a bit more aggressive.
He added that there is a lot of rescue capital right now waiting on the sidelines should any loans default.