The collapses of two banks, the ensuing measures the government had to take and the contagion worries that have gripped the market have re-ignited recession fears. Now, Elon Musk said that the most serious looming issue is the commercial real estate debt held on some banks’ balance sheets, which could precipitate the economy on the brink of disaster.
In a tweet replying to an earlier tweet from the Kobeissi Letter, Musk wrote: “This is by far the most serious looming issue. Mortgages too.”
The Kobeissi Letter, which publishes a weekly market commentary, tweeted on March 26 that over the next five years, more than $2.5 trillion in commercial real estate debt will mature — which it said is “by far more than any 5 year period in history.”
“Meanwhile, rates have more than doubled and commercial real estate is only 60-70% occupied,” the Kobeissi Letter tweet continued. “Refinancing these loans is going to be incredibly expensive and likely lead to the next major crisis. The worst part? 70% of commercial real estate loans are owned by small banks. Rapidly rising rates are teaching everyone a valuable lesson. There’s no such thing as ‘free’ money.”
The worries are being echoed elsewhere in the industry. According to The Wall Street Journal, smaller banks hold $2.3 trillion in commercial real estate debt, including rental-apartment mortgages. That represents almost 80% of commercial mortgages held by all banks, the WSJ noted, citing an analysis from data firm Trepp. In addition, at the median U.S. bank, commercial real-estate loans account for 38% of loan holdings, according to an analysis from KBW Research.
As The Wall Street Journal explained: “If those loans pay off, it would reassure markets. But a large number of defaults could force banks to mark down the value of these and other loans, analysts say, reinforcing fears over the financial health of the U.S. banking system.”
All of this comes against the backdrop of Silicon Valley Bank’s recent failure, which many experts say was due to poor management and an inability to adjust to rising interest rates.
In prepared remarks due to be given Tuesday to the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Fed Governor Michael Barr said SVB failed because it did not “effectively manage its interest rate and liquidity risk.” He added that it was “a textbook case of mismanagement.”
Indeed, interest rates that stayed near zero for too long allowed risk to intensify across the investing spectrum, according to a recent report from LPL Financial analysts Quincy Krosby and Jeffrey Buchbinder.
“With financial conditions remaining loose, risk taking was elevated in venture capital, private equity, and real estate, especially commercial real estate. But as the Fed finally launched its aggressive rate hiking campaign, the dynamic changed,” the analysts wrote. “The collapse of SVB, followed by the other banks that were victims of the immediate panic that ensued, is emblematic of the changing landscape. When all is said and done, the blame falls on all of the above for failing to recognize the risks associated with policies that allowed risk taking but then quickly turned off the spigots.”
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