1 00:00:03,160 --> 00:00:07,480 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:10,920 --> 00:00:13,560 Speaker 2: There's a funny phrase going around in many banking and 3 00:00:13,560 --> 00:00:17,520 Speaker 2: commercial real estate circles these days. Extend and pretend. 4 00:00:17,800 --> 00:00:20,640 Speaker 3: You pretend that the value of the building is the same, 5 00:00:20,920 --> 00:00:24,440 Speaker 3: and you extend the loane right so you don't recognize 6 00:00:24,440 --> 00:00:26,880 Speaker 3: the loss on the bank's balance sheet. 7 00:00:27,480 --> 00:00:31,040 Speaker 2: That's Bloomberg real Estate reporter Patrick Clark, And as he said, 8 00:00:31,280 --> 00:00:34,000 Speaker 2: extend and pretend is exactly what it sounds like. A 9 00:00:34,040 --> 00:00:36,880 Speaker 2: bank extends alone to a borrower and pretends that the 10 00:00:36,960 --> 00:00:40,199 Speaker 2: value of the building has stayed the same. Except in 11 00:00:40,240 --> 00:00:45,960 Speaker 2: today's economy, nothing has stayed the same. The exodus of 12 00:00:45,960 --> 00:00:49,479 Speaker 2: office workers from Downtown's after the COVID nineteen pandemic, and 13 00:00:49,520 --> 00:00:52,240 Speaker 2: then the rapid rise in interest rates flipped a lot 14 00:00:52,280 --> 00:00:56,200 Speaker 2: of long held commercial investment norms on their head. Natalie 15 00:00:56,240 --> 00:00:58,400 Speaker 2: Wong covers commercial real estate at Bloomberg. 16 00:00:58,920 --> 00:01:01,920 Speaker 1: For a long time, you have investors and lenders pouring 17 00:01:01,960 --> 00:01:06,240 Speaker 1: money into offices, specifically US offices, because that was seen 18 00:01:06,240 --> 00:01:08,280 Speaker 1: as like a safe alternative to bond. 19 00:01:08,800 --> 00:01:11,720 Speaker 2: She says those investments were backed by high quality buildings 20 00:01:11,760 --> 00:01:13,520 Speaker 2: at a time when no one would have guessed that 21 00:01:13,560 --> 00:01:16,319 Speaker 2: companies wouldn't have a need for workers in the office, So. 22 00:01:16,319 --> 00:01:18,800 Speaker 1: As long as you had companies growing, you would have 23 00:01:18,959 --> 00:01:22,120 Speaker 1: these basically long term investments that were backed by stable, 24 00:01:22,319 --> 00:01:22,920 Speaker 1: rising rents. 25 00:01:26,560 --> 00:01:30,320 Speaker 2: But now with many of these loans nearing maturity, commercial 26 00:01:30,319 --> 00:01:32,880 Speaker 2: property deals in the US are picking back up at 27 00:01:32,920 --> 00:01:36,280 Speaker 2: deep discounts and forcing lenders to face just how far 28 00:01:36,440 --> 00:01:41,160 Speaker 2: real estate prices have fallen. Today. On the show, we 29 00:01:41,240 --> 00:01:44,280 Speaker 2: discussed the widespread concern that these losses will ripple across 30 00:01:44,360 --> 00:01:47,880 Speaker 2: the global financial system and what it means for US cities. 31 00:01:49,080 --> 00:01:52,680 Speaker 2: This is the big take from Bloomberg News. I'm Sarah Holder. 32 00:01:59,480 --> 00:02:03,000 Speaker 1: We're final at a point where, you know, there's indication 33 00:02:03,160 --> 00:02:05,680 Speaker 1: from central banks around the world that even if rates 34 00:02:05,680 --> 00:02:08,160 Speaker 1: don't come down at least there'll be stable for the 35 00:02:08,160 --> 00:02:11,839 Speaker 1: foreseeable future, which is allowing people to make more calculations. 36 00:02:11,840 --> 00:02:13,840 Speaker 4: But at the same time, it's also. 37 00:02:13,800 --> 00:02:19,480 Speaker 1: Starting to initiate more deals for starting to see deals 38 00:02:19,520 --> 00:02:22,519 Speaker 1: picking up, Like, for example, you know, there's an office 39 00:02:22,520 --> 00:02:27,520 Speaker 1: building on seventeen forty Broadway. It's an office building in Manhattan. Blackstone, 40 00:02:27,960 --> 00:02:31,960 Speaker 1: a very reputable big asset manager, bought the building just 41 00:02:32,000 --> 00:02:34,160 Speaker 1: a couple of years ago, spent quite a bit of 42 00:02:34,200 --> 00:02:37,480 Speaker 1: money renovating the building, making it sort of an office 43 00:02:37,480 --> 00:02:39,800 Speaker 1: building that people talk about today with amenities. It's going 44 00:02:39,840 --> 00:02:43,080 Speaker 1: to attract people, that's going to attract people back to work. 45 00:02:43,360 --> 00:02:45,600 Speaker 1: And they walked away from that building two years ago. 46 00:02:45,639 --> 00:02:47,800 Speaker 1: They just decided to cut their loss because it wasn't 47 00:02:47,840 --> 00:02:51,320 Speaker 1: worth it to put in. They say, good money after 48 00:02:51,400 --> 00:02:54,160 Speaker 1: the bad. And now the debt that's behind that building 49 00:02:54,360 --> 00:02:57,400 Speaker 1: is being marketed at a fifty percent discount. So you're 50 00:02:57,440 --> 00:03:01,280 Speaker 1: seeing these massive discounts on these dominant buildings start to 51 00:03:01,320 --> 00:03:03,280 Speaker 1: show up in the market. And it's a lot harder 52 00:03:03,840 --> 00:03:07,919 Speaker 1: for whether it's the investor or the lender to tell 53 00:03:07,960 --> 00:03:10,280 Speaker 1: the regulator is that the value of a lot of 54 00:03:10,320 --> 00:03:11,800 Speaker 1: their buildings haven't fallen greatly. 55 00:03:11,840 --> 00:03:15,000 Speaker 4: And so I think this is starting to create. 56 00:03:14,880 --> 00:03:17,680 Speaker 1: More pressure, you know a little bit of panic too 57 00:03:17,760 --> 00:03:21,480 Speaker 1: from parts of you know, the lenders that hold these loans, 58 00:03:22,200 --> 00:03:25,040 Speaker 1: maybe even the owners of these buildings to finally start 59 00:03:25,080 --> 00:03:28,919 Speaker 1: to realize and admit just how far values have fallen. 60 00:03:29,000 --> 00:03:31,880 Speaker 1: And in some cases, you know, it could be that 61 00:03:32,000 --> 00:03:35,160 Speaker 1: the building that they owned is only at dirt value. 62 00:03:35,360 --> 00:03:39,000 Speaker 2: So Patrick, what these transactions are telling the market and 63 00:03:39,120 --> 00:03:42,960 Speaker 2: investors and developers is the true value of these buildings, 64 00:03:43,040 --> 00:03:46,760 Speaker 2: and that's indicating to them that we can't just extend 65 00:03:46,760 --> 00:03:47,600 Speaker 2: and pretend anymore. 66 00:03:48,000 --> 00:03:50,880 Speaker 3: You know, when everyone is pretending, then we can all pretend. 67 00:03:50,880 --> 00:03:53,720 Speaker 3: Nobody knows no office buildings have sold this year. How 68 00:03:53,720 --> 00:03:56,120 Speaker 3: can you possibly say that my building is worth fifty 69 00:03:56,160 --> 00:03:58,040 Speaker 3: percent of what it used to be what I paid 70 00:03:58,080 --> 00:04:01,520 Speaker 3: for it. But now you've got these high profile examples, 71 00:04:02,040 --> 00:04:03,880 Speaker 3: and it gets harder. 72 00:04:04,200 --> 00:04:05,839 Speaker 1: And I think one of the reasons that you could 73 00:04:05,840 --> 00:04:08,600 Speaker 1: look at is like, if you argue that interest rates 74 00:04:08,640 --> 00:04:10,560 Speaker 1: might come down, if they did rapidly, there's a way 75 00:04:10,600 --> 00:04:12,240 Speaker 1: they can just sort of skate through this and maybe 76 00:04:12,240 --> 00:04:14,160 Speaker 1: the values will come back up, because it's very much 77 00:04:14,160 --> 00:04:17,840 Speaker 1: intertwined to the borrowing costs. But I think people are 78 00:04:17,920 --> 00:04:21,719 Speaker 1: starting to recognize that, at least in the near term future, 79 00:04:22,200 --> 00:04:24,480 Speaker 1: interest rates may not go up, but they will stay 80 00:04:24,480 --> 00:04:26,840 Speaker 1: the same, and therefore they have to start underwriting the 81 00:04:26,839 --> 00:04:30,200 Speaker 1: costs of their property, the cost of their investments at 82 00:04:30,240 --> 00:04:30,840 Speaker 1: that level. 83 00:04:31,240 --> 00:04:34,080 Speaker 2: So, Patrick, what is the scale of the problem here? 84 00:04:34,120 --> 00:04:37,120 Speaker 2: How many millions of dollars of property holdings are we 85 00:04:37,160 --> 00:04:38,719 Speaker 2: talking about being at risk? 86 00:04:39,279 --> 00:04:42,359 Speaker 3: We said twenty trillion dollars worth of commercial property in 87 00:04:42,360 --> 00:04:45,360 Speaker 3: the US. That's the best number available, but at any rate, 88 00:04:45,800 --> 00:04:48,440 Speaker 3: it's a bigger number than I can get my head around. 89 00:04:48,600 --> 00:04:52,520 Speaker 3: There's more than a trillion dollars worth of commercial real 90 00:04:52,640 --> 00:04:56,440 Speaker 3: estate loans reaching maturity point in twenty twenty four, in 91 00:04:56,480 --> 00:04:59,760 Speaker 3: twenty twenty five. Again, what is a trillion dollars? It's 92 00:04:59,760 --> 00:05:05,200 Speaker 3: a lot. And the problem is that the buildings are 93 00:05:05,279 --> 00:05:08,359 Speaker 3: no longer worth as much as they were. That's the 94 00:05:08,400 --> 00:05:11,680 Speaker 3: heart of the problem. And again for the buildings that 95 00:05:11,720 --> 00:05:14,280 Speaker 3: are performing well, it's less of a problem, but it's 96 00:05:14,320 --> 00:05:18,039 Speaker 3: still an issue. The building is likely worthless, so the 97 00:05:18,080 --> 00:05:20,839 Speaker 3: bank's collateral is not as good. It can't extend as 98 00:05:20,920 --> 00:05:25,200 Speaker 3: much credit, and so it's harder to refinance the property. 99 00:05:25,440 --> 00:05:27,920 Speaker 3: And then maybe it is a building that has these 100 00:05:28,000 --> 00:05:31,000 Speaker 3: huge problems because people aren't showing up to work anymore. 101 00:05:31,040 --> 00:05:34,240 Speaker 3: People are logging on from home. Now the collateral is 102 00:05:34,279 --> 00:05:37,839 Speaker 3: worth an even greater discount. And so that's where you 103 00:05:37,880 --> 00:05:42,279 Speaker 3: get in this situation where you can't extend and pretend anymore. 104 00:05:42,640 --> 00:05:47,080 Speaker 3: And the borrower is going to decide either Okay, I'm 105 00:05:47,120 --> 00:05:48,800 Speaker 3: gonna go in my wallet and I'm gonna come up 106 00:05:48,800 --> 00:05:51,160 Speaker 3: with some extra money, and I'm gonna make this right, 107 00:05:51,520 --> 00:05:54,240 Speaker 3: or at that point the borrower can also just say 108 00:05:54,880 --> 00:05:57,520 Speaker 3: bye bye, it's your building now, and then it's the 109 00:05:57,600 --> 00:05:58,640 Speaker 3: lenders problem. 110 00:05:58,680 --> 00:06:02,040 Speaker 2: And Natalie, this isn't just a problem for the US, right, 111 00:06:02,400 --> 00:06:05,760 Speaker 2: Is there risk here for financial institutions and lenders globally? 112 00:06:06,320 --> 00:06:09,640 Speaker 1: Yes, it's it's rippling out already. We're seeing across the 113 00:06:09,640 --> 00:06:13,880 Speaker 1: global financial system. You know, with the New York Community 114 00:06:13,960 --> 00:06:17,800 Speaker 1: Bank shock in January, when you know, their stock completely 115 00:06:17,800 --> 00:06:21,200 Speaker 1: plunged because they were marking down much bigger reserves for 116 00:06:21,240 --> 00:06:22,800 Speaker 1: losses tied to commercial real estate. 117 00:06:23,040 --> 00:06:24,400 Speaker 4: We st start to ripple out. 118 00:06:24,440 --> 00:06:27,599 Speaker 1: In Japan, the Azora Bank also took a big hit 119 00:06:27,760 --> 00:06:32,320 Speaker 1: with losses mainly tied to US commercial real estate struggling 120 00:06:32,440 --> 00:06:36,960 Speaker 1: US offices South Korea. Their asset managers and their lenders 121 00:06:37,200 --> 00:06:40,560 Speaker 1: were very big on US commercial real estate and office 122 00:06:40,600 --> 00:06:43,320 Speaker 1: loans over the past few years, and so they're expecting 123 00:06:43,480 --> 00:06:46,640 Speaker 1: a wave of bad loans to come to But it's 124 00:06:46,720 --> 00:06:50,880 Speaker 1: it's shocking because these are long term institutional investors either 125 00:06:51,000 --> 00:06:53,239 Speaker 1: supposed to make smart investments. They're not the ones taking 126 00:06:53,279 --> 00:06:56,440 Speaker 1: the biggest risk, and they're already starting to see some 127 00:06:56,560 --> 00:06:59,960 Speaker 1: of the impacts of having to mark down these lower values, 128 00:07:00,040 --> 00:07:02,200 Speaker 1: and we're starting to see them some of them at least, 129 00:07:02,240 --> 00:07:06,040 Speaker 1: you know, cut their losses on specific things, but they're 130 00:07:06,520 --> 00:07:09,840 Speaker 1: exposed to the US real estate market. 131 00:07:09,880 --> 00:07:12,440 Speaker 2: After the break. What these loans coming do mean for 132 00:07:12,520 --> 00:07:15,160 Speaker 2: the US banking industry and who might come out of 133 00:07:15,160 --> 00:07:26,080 Speaker 2: this on top? So, I mean, if they can't get 134 00:07:26,120 --> 00:07:28,960 Speaker 2: these loans off their books, what does that mean for 135 00:07:29,360 --> 00:07:33,200 Speaker 2: the banking sector? How much trouble could these banks be in. 136 00:07:33,560 --> 00:07:37,920 Speaker 3: I think there's a general sense, even irrespective of commercial 137 00:07:37,960 --> 00:07:40,440 Speaker 3: real estate, was that there might be too many banks 138 00:07:40,440 --> 00:07:43,240 Speaker 3: in the US. You know, there's like forty five hundred 139 00:07:43,360 --> 00:07:47,000 Speaker 3: banks or you know, we're real estate reporters, not necessarily 140 00:07:47,040 --> 00:07:51,920 Speaker 3: banking experts, but we certainly hear people say over the 141 00:07:51,920 --> 00:07:54,840 Speaker 3: next couple of years, with commercial real estate debt as 142 00:07:54,920 --> 00:07:58,680 Speaker 3: a catalyst, hundreds, if not thousands of banks are going 143 00:07:58,720 --> 00:08:00,760 Speaker 3: to go away, either because the go out of business, 144 00:08:00,840 --> 00:08:03,240 Speaker 3: or they need to be swallowed up, or they need 145 00:08:03,280 --> 00:08:07,840 Speaker 3: to join forces with another weak bank to survive. It's 146 00:08:07,840 --> 00:08:10,800 Speaker 3: certainly one that our newsroom is really keyed in on 147 00:08:11,040 --> 00:08:12,920 Speaker 3: to see how this plays out. 148 00:08:13,680 --> 00:08:15,800 Speaker 2: And so this is mostly a problem for these smaller 149 00:08:16,120 --> 00:08:18,040 Speaker 2: and regional and mid size banks. 150 00:08:18,440 --> 00:08:20,520 Speaker 3: It's a bigger problem for them, you know. I mean, 151 00:08:20,520 --> 00:08:22,640 Speaker 3: if you're JP Morgan and you you have all of 152 00:08:22,680 --> 00:08:27,560 Speaker 3: these different businesses that generate revenue for you, and your 153 00:08:27,600 --> 00:08:30,640 Speaker 3: commercial mortgages are a much smaller percentage of the assets 154 00:08:30,680 --> 00:08:33,760 Speaker 3: on your balance sheet, and so if those assets wind 155 00:08:33,840 --> 00:08:36,400 Speaker 3: up getting you know, turning out to be worth seventy 156 00:08:36,440 --> 00:08:38,560 Speaker 3: cents on the dollar, you're still you know, I'm not 157 00:08:38,600 --> 00:08:40,440 Speaker 3: saying that's the case there, but you can come back 158 00:08:40,440 --> 00:08:43,079 Speaker 3: from that. Whereas you know, if you're a regional bank 159 00:08:43,080 --> 00:08:45,960 Speaker 3: in Tulsa and you know you've got a few bad 160 00:08:46,000 --> 00:08:48,200 Speaker 3: office loans, like that could wind up being a really 161 00:08:48,240 --> 00:08:48,960 Speaker 3: big deal for you. 162 00:08:49,320 --> 00:08:53,559 Speaker 2: I guess like there are winners and losers here right A. 163 00:08:54,040 --> 00:08:54,880 Speaker 2: Who are the winners? 164 00:08:55,120 --> 00:08:58,080 Speaker 1: There's a lot of people out there that are flushed 165 00:08:58,080 --> 00:08:59,960 Speaker 1: with cash. Some of the buildings that we talked about 166 00:09:00,120 --> 00:09:02,080 Speaker 1: were in distress, you know, the owners that walked away 167 00:09:02,080 --> 00:09:05,720 Speaker 1: from it. Like Blackstone just closed a record breaking property 168 00:09:05,760 --> 00:09:08,559 Speaker 1: fund last year. They have more than thirty billion dollars 169 00:09:08,600 --> 00:09:11,840 Speaker 1: in capital commitments and they're actively out there looking to 170 00:09:11,880 --> 00:09:15,360 Speaker 1: invest that money in real estate. They were the buyers 171 00:09:15,520 --> 00:09:19,560 Speaker 1: of the largest chunk of that failed Signature Bank. Commercial 172 00:09:19,559 --> 00:09:22,280 Speaker 1: real estate loans and they were the buyers behind that. 173 00:09:22,400 --> 00:09:24,480 Speaker 1: So you have them walking away from this one off 174 00:09:24,520 --> 00:09:26,640 Speaker 1: office building that they rode off two years ago on 175 00:09:26,920 --> 00:09:29,360 Speaker 1: Broadway in New York City. But on the other hand, 176 00:09:29,400 --> 00:09:33,040 Speaker 1: they're deploying billions of dollars into other real estate opportunities, right, 177 00:09:33,080 --> 00:09:34,680 Speaker 1: So they're still bullish on a sector. 178 00:09:35,040 --> 00:09:37,600 Speaker 3: I think you can also take solace in the creative 179 00:09:37,600 --> 00:09:41,440 Speaker 3: destruction aspect of it. Like, the reason why these office 180 00:09:41,440 --> 00:09:45,240 Speaker 3: buildings are not worth as much is because they're functionally 181 00:09:45,280 --> 00:09:49,920 Speaker 3: obsolete or largely obsolete, and we shouldn't try to hold 182 00:09:49,960 --> 00:09:53,880 Speaker 3: on to that, right, commuting sixty minutes, ninety minutes whatever 183 00:09:54,120 --> 00:09:57,400 Speaker 3: to go sit in a dreary office building, you know, 184 00:09:57,559 --> 00:10:00,880 Speaker 3: with bad fluorescent lighting and you know, one of those 185 00:10:00,920 --> 00:10:04,439 Speaker 3: sort of Warren of cubicle type things like why say that? 186 00:10:04,640 --> 00:10:07,080 Speaker 3: Who was that good for? So I think it's not 187 00:10:07,200 --> 00:10:10,480 Speaker 3: all bad when things age out of usefulness, we have 188 00:10:10,559 --> 00:10:11,920 Speaker 3: something else that's better now. 189 00:10:12,720 --> 00:10:15,240 Speaker 2: Well, Natalie Patrick, thank you so much for being here 190 00:10:15,280 --> 00:10:20,360 Speaker 2: and sharing your reporting. Thank you, Thank you, thanks for 191 00:10:20,440 --> 00:10:23,600 Speaker 2: listening to the Big Take from Bloomberg News. I'm Sarah Holder. 192 00:10:23,840 --> 00:10:26,720 Speaker 2: This episode was produced by Alex Suguiera. It was edited 193 00:10:26,760 --> 00:10:29,960 Speaker 2: by Caitlin Kenney and Kara Wetzel. It was fact checked 194 00:10:30,000 --> 00:10:33,520 Speaker 2: by Stacy Renee. It was mixed by Alex Suguiera. Our 195 00:10:33,559 --> 00:10:37,000 Speaker 2: senior producers are Naomi Shavin and Jill Diddy Carly. We 196 00:10:37,040 --> 00:10:41,200 Speaker 2: get editorial direction from Elizabeth Ponso Nicole beemsterbor is our 197 00:10:41,240 --> 00:10:45,560 Speaker 2: executive producer. Sage Bauman is Bloomberg's head of podcasts. Thanks 198 00:10:45,600 --> 00:10:47,480 Speaker 2: for listening. We'll be back next week.