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The Incoming Commercial Real Estate Crisis No One Seems Prepared For

The Incoming Commercial Real Estate Crisis No One Seems Prepared For

It has been a year since a string of U.S. regional bank failures, together with the collapse of global heavyweight Credit Suisse, caused many to fear that a major financial crisis was imminent.

But, by the summer of 2023, the panicked withdrawals by frightened depositors largely subsided.

In February, however, New York Community Bank (NYCB) appeared to resurrect the crisis when it announced $2.4 billion in losses, fired its CEO, and faced credit downgrades from rating agencies Fitch and Moodys.

In what has become a familiar tale for U.S. regional banks, NYCB’s share price plummeted by 60 percent virtually overnight, erasing billions of dollars from its market value, and its depositors fled en masse.

“I think that there’s more to come,” Peter Earle, a securities analyst and senior research fellow at the American Institute for Economic Research, told The Epoch Times.

Underlying this year’s turbulence is the fact that many regional banks are sitting on large portfolios of distressed commercial real estate (CRE) loans. according to Mr. Earle. And many are attempting to cope through a process called “extend and pretend,” in which they grant insolvent borrowers more time to pay in hopes that things will get better.

“There is trouble out there, and most of it probably won’t be realized because of the ability to roll some of these loans forward and buy a few more years, and maybe things will recover by then,” he said.

“But all it does is it kicks the can down the road, and it basically means a more fragile financial system in the medium term.”

…click on the above link to read the rest of the article…

The Meltdown of Commercial Real Estate

The Meltdown of Commercial Real Estate

Commentary
In case you’ve still got money in a bank, Bloomberg is warning that defaults in commercial real estate loans could “topple” hundreds of U.S. banks.

Leaving taxpayers on the hook for trillions in losses.

The note, by senior editor James Crombie, walks us through the festering hellscape that is commercial real estate.

To set the mood, a new study predicts that nearly half of downtown Pittsburgh office space could be vacant in four years. Major cities such as San Francisco are already sporting zombie-apocalypse downtowns, with abandoned office buildings baking in the sun.

So what happened?

The Fed’s yo-yo interest rates first flooded real estate with low rates and cheap money. Which were overbuilt.

Then came the lockdowns, which forced millions to figure out new workday patterns. People liked foregoing the long commute (not to mention the free money). Despite every effort, downtown businesses have not been able to get all workers back.

These days, everyone talks about hybrid models of working, some in-person and some remote. But judging from observation, remote is winning. In any case, even a 30 percent reduction in the footprint of office space once the leases are renewed could topple the entire sector.

The restaurant and retail sectors of downtown feel the pinch, with more closures all the time. Adding to the pressure are absurd levels of inflation and ever-riskier streets on matters of personal security. Put it all together and there is ever less reason to slog to the office.

When the Fed panic-hiked interest rates in the 2021 inflation, that put trillions of commercial real estate underwater even without other factors. Add to that crime, inflation, plus remote work, and you have a dangerous mix that could topple cities as we know them.

…click on the above link to read the rest of the article…

Dominoes: After NYCB, Shares Of Japanese Bank Implode On Massive US CRE Writedown

Dominoes: After NYCB, Shares Of Japanese Bank Implode On Massive US CRE Writedown

Following a profit warning from New York Community Bancorp on Wednesday, partially attributed to turmoil in the commercial real estate sector, Japan’s Aozora Bank Ltd. slashed the value of some of its US office tower loans by more than 50%, according to Bloomberg.

New York Community Bancorp’s move to slash its dividend and bolster reserves led to a 38% plunge in its shares yesterday, also triggering the largest drop in the KBW Regional Banking Index since the collapse of Silicon Valley Bank last March.

Like rows of falling dominoes, Aozora Bank, the 16th largest in Japan by market value, recorded a 20% plunge in shares on Thursday after reporting a net loss of 28 billion yen ($191 million) for the fiscal year. This was in stark contrast to its earlier projection of a 24 billion yen profit.

Aozora wrote down the value of its non-performing office loans by 58%, including a 63% reduction in Chicago and between 51% and 59% in New York, Washington D.C., Los Angeles, and San Francisco – all of these cities are plagued with violent crime and controlled by radical Democrats.

US office loans totaled about 6.6%, or approximately $1.89 billion. It said 21 office loans worth $719 million were classified as non-performing. It increased its loan-loss reserve ratio on US offices to 18.8% from 9.1%.

Several months ago, we pointed out: “Next bank failure will be in Japan.”

“It’s a shock,” said Tomoichiro Kubota, a senior market analyst at Matsui Securities Co., adding, “The expectation was the worst was over and that the bank had set aside enough provisions.”

For lenders, this development is a major warning sign that a tsunami of office loan defaults could be on the horizon. Many landlords struggle to repay or finance existing loans in an environment with high-interest rates. Some are simply walking away from properties.

…click on the above link to read the rest…

The Canary In Coalmine: Bank OZK Plummets After Shock Commercial Real Estate Write Downs

In what may be the deadest canary in the commercial real estate coal mine yet, Bank OZK shares have plunged 26% today after the bank reported abysmal third-quarter earnings that trailed expectations, with net income tumbling but what caught traders’ attention was two commercial real estate charge-offs of $45.5 million on the bank’s Real Estate Specialties Group (RESG) credits for unrelated projects in South and North Carolina.

The Little Rock-based regional bank, with just over $22 billion in assets, also reported that net income declined 23% to $74.2 million in its third quarter from the same period in 2017 due to these write-offs. Bank OZK’s earnings have been closely monitored by analysts since it is such an active real estate lender. The bank reported that the two write-offs during the third quarter were in its Real Estate Specialties Group (“RESG”) portfolio and were related to properties in South Carolina and North Carolina from loans originated in 2007 and 2008, the Real Deal reported.

The bank said in its management comments that its South Carolina charge-off was secured by a regional mall, which has suffered from both “declining property performance and increasing interest rates.” The project was further impacted by uncertainty related to anchor tenants Sears and JC Penney. The North Carolina charge-off was secured by a multi-phase land, residential lot and residential home project, with the bank noting that the homes have not sold well in part due to “cheaper pricing on existing homes.”

What shocked analysts, however, is that these properties had allowance allocations totaling only $19.1 million as of June 30. But after new appraisals, which were much lower than it initially presumed, the bank said it would have to write down each credit to about 80% of its recent appraised value. The combined charge-offs on the two loans in the third quarter came to $45.5 million.

…click on the above link to read the rest of the article…

A Contagious Crisis Of Confidence In Corporate Credit

A Contagious Crisis Of Confidence In Corporate Credit

Credit is not innately good or bad. Simplistically, productive Credit is constructive, while non-productive Credit is inevitably problematic. This crucial distinction tends to be masked throughout the boom period. Worse yet, a prolonged boom in “productive” Credit – surely fueled by some type of underlying monetary disorder – can prove particularly hazardous (to finance and the real economy).

Fundamentally, Credit is unstable. It is self-reinforcing and prone to excess. Credit Bubbles foment destabilizing price distortions, economic maladjustment, wealth redistribution and financial and economic vulnerability. Only through “activist” government intervention and manipulation will protracted Bubbles reach the point of precarious systemic fragility. Government/central bank monetary issuance coupled with market manipulations and liquidity backstops negates the self-adjusting processes that would typically work to restrain Credit and other financial excess (and shorten the Credit cycle).

A multi-decade experiment in unfettered “money” and Credit has encompassed the world. Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global scale. This historic experiment climaxed with a seven-year period of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed and the unwind has commenced.

The U.S. repudiation of the gold standard in 1971 was a critical development. The seventies oil shocks, “stagflation” and the Latin American debt debacle were instrumental. Yet I view the Greenspan Fed’s reaction to the 1987 stock market crash as the defining genesis of today’s fateful global Credit Bubble.

The Fed’s explicit assurances of marketplace liquidity came at a critical juncture for the evolution to market-based finance.

…click on the above link to read the rest of the article…

Negative Interest Rates Already In Fed’s Official Scenario

Negative Interest Rates Already In Fed’s Official Scenario

Over the past year, and certainly in the aftermath of the BOJ’s both perplexing and stunning announcement (as it revealed the central banks’ level of sheer desperation), we have warned (most recently “Negative Rates In The U.S. Are Next: Here’s Why In One Chart”) that next in line for negative rates is the Fed itself, whether Janet Yellen wants it or not. Today, courtesy of Wolf Richter, we find that this is precisely what is already in the small print of the Fed’s future stress test scenarios, and specifically the “severely adverse scenario” where we read that:

The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.

As a result of the severe decline in real activity and subdued inflation, short-term Treasury rates fall to negative ½ percent by mid-2016 and remain at that level through the end of the scenario.
And so the strawman has been laid. The only missing is the admission of the several global recession, although with global GDP plunging over 5% in USD terms, we wonder just what else those who make the official determination are waiting for.

Finally, we disagree with the Fed that QE4 is not on the table: it most certainly will be once stock markets plunge by 50% as the “severely adverse scenario” envisions, and once NIRP fails to boost economic activity, as it has failed previously everywhere else it has been tried, the Fed will promtply proceed with what has worked before, if only to make the true situation that much worse.

Until then, we sit back and wait.

Here is Wolf Richter with Negative Interest Rates Already in Fed’s Official Scenario

…click on the above link to read the rest of the article…

Alberta Loses Most Jobs In 34 Years As Oil Crunch Cripples Labor Market

Alberta Loses Most Jobs In 34 Years As Oil Crunch Cripples Labor Market

Times are tough in Alberta and to be sure, we’ve piled it on heavy when it comes to cataloguing the long list of pitiable outcomes that have accompanied crude’s steep slide.

The province is at the center of Canada’s dying oil patch and as crude extended its seemingly endless decline last year, Alberta saw oil and gas investment plunge by a third. That’s bad news for authorities who count on resources for 30% of provincial revenues.

Rig activity fell by half in the first seven months of 2015 and as the job losses mounted, the sorrow deepened – literally. Suicide rates jumped by 30% and in Calgary commercial break-ins almost doubled from a year earlier, while bank robberies were up 65% and home invasions increased 52% (read more here).

Meanwhile, food bank usage spiked as those who used to be donors found themselves depending on the free meals for subsistence.

And speaking of food, prices for fresh fruit and vegetables are seeing double-digit inflation thanks to the plunging loonie.

All in all, a very bad situation indeed and on Tuesday we learned that the picture was actually materially worse than an initial round of statistics led us to believe.

“Statscan’s annual revisions of its national Labour Force Survey data ratcheted up Alberta’s net job losses last year to 19,600, from the 14,600 the statistical agency originally reported in its final 2015 survey released in early January,” The Globe And Mail reports, adding that the losses “exceed the 17,000 jobs Alberta shed in the Great Recession in 2009.”

In fact, 2015 was the worst year for job losses in the province since 1982.

By the end of last year, Alberta’s unemployment rate had risen to 7.1% from just 4.8% at the end of 2014. As The Globe And Mail goes on to note, that’s the highest level in two decades. And it’s projected to get worse. Alberta could see unemployment rise to 7.5% in H1.

…click on the above link to read the rest of the article…

“Canadians Should Be Concerned” As Energy Sector Job Losses Spike To 100,000 This Year

“Canadians Should Be Concerned” As Energy Sector Job Losses Spike To 100,000 This Year

It’s grim up north… and getting grimmer. Amid soaring suicide rates, Canada’s once-booming oil patch is rapidly accelerating its downward trajectory. “Canadians should be concerned in times like these,” warned Tim McMillan, president and chief executive of the Canadian Association of Petroleum Producers, noting that the oil and gas sector will see 100,000 job losses by the end of this year. Even if oil prices rise early and fast next year, Financial Post reportsit may take a while for Canadian oilsands to rebound as the industry has mothballed a number of long-term projects.

Over the past year, we have extensively chronicled the tragic story of Alberta – Canada’s once booming oilpatch – disintegrate slowly at first, then very fast, into an economic and financial wasteland:

And, in one of the latest articles of this sad series describing the Alberta “bloodbath”, we said that the worst casualty of Canada’s recession has been the local commercial real estate market, where office vacancies are about to surpass the aftermath of the (first) great financial crisis.

But, it turns out the biggest casualty of Canada’s recession, which unless oil rebounds strongly soon will follow Brazil into an all out depression, are people themselves. As CBC reports the suicide rate in Alberta has increased dramatically in the wake of mounting job losses across the province.

Sadly, as The Financial Post reports, the situation looks set to get worse… as policy uncertainty has exacerbated the pain of low prices

…click on the above link to read the rest of the article…

Suicides In Alberta Soar In Wake Of Canada’s Oilpatch Depression

Suicides In Alberta Soar In Wake Of Canada’s Oilpatch Depression

Over the past year, we have extensively chronicled the tragic story of Alberta – Canada’s once booming oilpatch – disintegrate slowly at first, then very fast, into an economic and financial wasteland:

And, in the last article in this sad series describing the Alberta “bloodbath”, we said that the biggest casualty of Canada’s recession has been the local commercial real estate market, where office vacancies are about to surpass the aftermath of the (first) great financial crisis.

We were wrong: the biggest casualty of Canada’s recession, which unless oil rebounds strongly soon will follow Brazil into an all out depression, are people themselves. As CBC reports the suicide rate in Alberta has increased dramatically in the wake of mounting job losses across the province.

According to the Canadian media, the most recent data only goes to June, but according to the chief medical examiner’s office, 30 per cent more Albertans took their lives in the first half of this year compared to the same period last year.

That’s how bad Canada’s economic recession is: the real casualties are no longer metaphorical economic objects, but the very people who until recently enjoyed comfortable lives only to succumb to an unprecedented collapse in the local economy.

Here are the statistics as reported by CBC:

  • From January to June 2014, there were 252 suicides in Alberta.
  • During the same period this year, there were 327.

…click on the above link to read the rest of the article…

“It’s A Bloodbath” – Here Is The Biggest Casualty Of Canada’s Recession

“It’s A Bloodbath” – Here Is The Biggest Casualty Of Canada’s Recession

In the past year, we have extensively profiled the collapse of ground zero of Canada’s oil industry, Calgary, as a result of the plunge in the price of oil, in posts such as the following:

Since then it has only gotten worse for Canada, and as of two it culminated with the first official recession in 7 years.

Additionally, in September we profiled the expected collapse of the Calgary commercial real estate market when we reported that in Alberta Canada now has 1.7 million square feet of empty office space, the most in North America, with another 5.2 million under construction! After years of booming construction, the natural resource rich country is starting to feel the pinch.

Overnight Bloomberg followed up on this stunning deterioration when it, too, reported that “office-tower owners in Canada’s energy hub are about to feel the full force of the oil-price crash.”

Using data from real estate brokers including Jones Lang LaSalle Inc. and Avison Young, Bloomberg calculates that vacancy is already at a five-year high in Calgary and rents are the lowest since 2006 after thousands of office jobs were cut. Energy company tenants have now begun to ask for rental relief and are offering subleases for as little as half the going rate.

The backlog is even worse: five new office towers with about 3.8 million square feet (353,031 square meters) of space hits the market in the next three years.

…click on the above link to read the rest of the article…

“Bank Failures and Systemic Breakdowns”: Regulator Warns on Autos, Subprime, Commercial Real-Estate…

“Bank Failures and Systemic Breakdowns”: Regulator Warns on Autos, Subprime, Commercial Real-Estate…

If you look at auto sales, which are flirting with all-time highs, and at commercial real-estate prices, which are way beyond all-time highs, and if you look at the loans, including subprime, that make it all happen, you’d think the US economy is in a white-hot economic boom.

But the economy is barely limping along. What’s booming is cheap but iffy debt that for the moment still looks good on the surface. And that is rattling bank regulators.

“We are clearly reaching the point in the cycle where credit risk is moving to the forefront,” explained Thomas Curry, Comptroller of the Currency, in a speech today. The Office of the Comptroller of the Currency (OCC) – one in the triad of federal bank regulators alongside the Fed and the FDIC – is fretting about banks’ exposure to the increasing risks of ballooning auto loans, particularly subprime auto loans, and commercial real-estate loans.

As they did in the run-up to the Financial Crisis, banks are “repackaging” these loans, including subprime loans, into highly-rated asset-backed securities, in face of “strong demand by investors” that are reaching for yield, in an environment where banks “are reaching for loan growth.” After having “already extended credit to their best customers,” they’re now lending to “less creditworthy borrowers, with all of the increased risk that entails.”

But the auto-loan binge is good for everyone. It’s good “for automakers and the economy,” he said. “It’s also good for banks,” whose financing made “this activity possible.” By the end of Q2, auto loans accounted for 10% of all retail credit in OCC-regulated banks, up from 7% in Q2 2011.

Total auto-loan balances outstanding shot up 10.5% in 12 months at the end of the second quarter and hit $1 trillion, according to Equifax. And 23.5% of new loans earlier this year were subprime, up from 22.7% a year ago.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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