Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: There's a funny phrase going around in many banking and
Speaker 2: commercial real estate circles these days. Extend and pretend.
Speaker 3: You pretend that the value of the building is the same,
Speaker 3: and you extend the loane right so you don't recognize
Speaker 3: the loss on the bank's balance sheet.
Speaker 2: That's Bloomberg real Estate reporter Patrick Clark, And as he said,
Speaker 2: extend and pretend is exactly what it sounds like. A
Speaker 2: bank extends alone to a borrower and pretends that the
Speaker 2: value of the building has stayed the same. Except in
Speaker 2: today's economy, nothing has stayed the same. The exodus of
Speaker 2: office workers from Downtown's after the COVID nineteen pandemic, and
Speaker 2: then the rapid rise in interest rates flipped a lot
Speaker 2: of long held commercial investment norms on their head. Natalie
Speaker 2: Wong covers commercial real estate at Bloomberg.
Speaker 1: For a long time, you have investors and lenders pouring
Speaker 1: money into offices, specifically US offices, because that was seen
Speaker 1: as like a safe alternative to bond.
Speaker 2: She says those investments were backed by high quality buildings
Speaker 2: at a time when no one would have guessed that
Speaker 2: companies wouldn't have a need for workers in the office, So.
Speaker 1: As long as you had companies growing, you would have
Speaker 1: these basically long term investments that were backed by stable,
Speaker 1: rising rents.
Speaker 2: But now with many of these loans nearing maturity, commercial
Speaker 2: property deals in the US are picking back up at
Speaker 2: deep discounts and forcing lenders to face just how far
Speaker 2: real estate prices have fallen. Today. On the show, we
Speaker 2: discussed the widespread concern that these losses will ripple across
Speaker 2: the global financial system and what it means for US cities.
Speaker 2: This is the big take from Bloomberg News. I'm Sarah Holder.
Speaker 1: We're final at a point where, you know, there's indication
Speaker 1: from central banks around the world that even if rates
Speaker 1: don't come down at least there'll be stable for the
Speaker 1: foreseeable future, which is allowing people to make more calculations.
Speaker 4: But at the same time, it's also.
Speaker 1: Starting to initiate more deals for starting to see deals
Speaker 1: picking up, Like, for example, you know, there's an office
Speaker 1: building on seventeen forty Broadway. It's an office building in Manhattan. Blackstone,
Speaker 1: a very reputable big asset manager, bought the building just
Speaker 1: a couple of years ago, spent quite a bit of
Speaker 1: money renovating the building, making it sort of an office
Speaker 1: building that people talk about today with amenities. It's going
Speaker 1: to attract people, that's going to attract people back to work.
Speaker 1: And they walked away from that building two years ago.
Speaker 1: They just decided to cut their loss because it wasn't
Speaker 1: worth it to put in. They say, good money after
Speaker 1: the bad. And now the debt that's behind that building
Speaker 1: is being marketed at a fifty percent discount. So you're
Speaker 1: seeing these massive discounts on these dominant buildings start to
Speaker 1: show up in the market. And it's a lot harder
Speaker 1: for whether it's the investor or the lender to tell
Speaker 1: the regulator is that the value of a lot of
Speaker 1: their buildings haven't fallen greatly.
Speaker 4: And so I think this is starting to create.
Speaker 1: More pressure, you know a little bit of panic too
Speaker 1: from parts of you know, the lenders that hold these loans,
Speaker 1: maybe even the owners of these buildings to finally start
Speaker 1: to realize and admit just how far values have fallen.
Speaker 1: And in some cases, you know, it could be that
Speaker 1: the building that they owned is only at dirt value.
Speaker 2: So Patrick, what these transactions are telling the market and
Speaker 2: investors and developers is the true value of these buildings,
Speaker 2: and that's indicating to them that we can't just extend
Speaker 2: and pretend anymore.
Speaker 3: You know, when everyone is pretending, then we can all pretend.
Speaker 3: Nobody knows no office buildings have sold this year. How
Speaker 3: can you possibly say that my building is worth fifty
Speaker 3: percent of what it used to be what I paid
Speaker 3: for it. But now you've got these high profile examples,
Speaker 3: and it gets harder.
Speaker 1: And I think one of the reasons that you could
Speaker 1: look at is like, if you argue that interest rates
Speaker 1: might come down, if they did rapidly, there's a way
Speaker 1: they can just sort of skate through this and maybe
Speaker 1: the values will come back up, because it's very much
Speaker 1: intertwined to the borrowing costs. But I think people are
Speaker 1: starting to recognize that, at least in the near term future,
Speaker 1: interest rates may not go up, but they will stay
Speaker 1: the same, and therefore they have to start underwriting the
Speaker 1: costs of their property, the cost of their investments at
Speaker 1: that level.
Speaker 2: So, Patrick, what is the scale of the problem here?
Speaker 2: How many millions of dollars of property holdings are we
Speaker 2: talking about being at risk?
Speaker 3: We said twenty trillion dollars worth of commercial property in
Speaker 3: the US. That's the best number available, but at any rate,
Speaker 3: it's a bigger number than I can get my head around.
Speaker 3: There's more than a trillion dollars worth of commercial real
Speaker 3: estate loans reaching maturity point in twenty twenty four, in
Speaker 3: twenty twenty five. Again, what is a trillion dollars? It's
Speaker 3: a lot. And the problem is that the buildings are
Speaker 3: no longer worth as much as they were. That's the
Speaker 3: heart of the problem. And again for the buildings that
Speaker 3: are performing well, it's less of a problem, but it's
Speaker 3: still an issue. The building is likely worthless, so the
Speaker 3: bank's collateral is not as good. It can't extend as
Speaker 3: much credit, and so it's harder to refinance the property.
Speaker 3: And then maybe it is a building that has these
Speaker 3: huge problems because people aren't showing up to work anymore.
Speaker 3: People are logging on from home. Now the collateral is
Speaker 3: worth an even greater discount. And so that's where you
Speaker 3: get in this situation where you can't extend and pretend anymore.
Speaker 3: And the borrower is going to decide either Okay, I'm
Speaker 3: gonna go in my wallet and I'm gonna come up
Speaker 3: with some extra money, and I'm gonna make this right,
Speaker 3: or at that point the borrower can also just say
Speaker 3: bye bye, it's your building now, and then it's the
Speaker 3: lenders problem.
Speaker 2: And Natalie, this isn't just a problem for the US, right,
Speaker 2: Is there risk here for financial institutions and lenders globally?
Speaker 1: Yes, it's it's rippling out already. We're seeing across the
Speaker 1: global financial system. You know, with the New York Community
Speaker 1: Bank shock in January, when you know, their stock completely
Speaker 1: plunged because they were marking down much bigger reserves for
Speaker 1: losses tied to commercial real estate.
Speaker 4: We st start to ripple out.
Speaker 1: In Japan, the Azora Bank also took a big hit
Speaker 1: with losses mainly tied to US commercial real estate struggling
Speaker 1: US offices South Korea. Their asset managers and their lenders
Speaker 1: were very big on US commercial real estate and office
Speaker 1: loans over the past few years, and so they're expecting
Speaker 1: a wave of bad loans to come to But it's
Speaker 1: it's shocking because these are long term institutional investors either
Speaker 1: supposed to make smart investments. They're not the ones taking
Speaker 1: the biggest risk, and they're already starting to see some
Speaker 1: of the impacts of having to mark down these lower values,
Speaker 1: and we're starting to see them some of them at least,
Speaker 1: you know, cut their losses on specific things, but they're
Speaker 1: exposed to the US real estate market.
Speaker 2: After the break. What these loans coming do mean for
Speaker 2: the US banking industry and who might come out of
Speaker 2: this on top? So, I mean, if they can't get
Speaker 2: these loans off their books, what does that mean for
Speaker 2: the banking sector? How much trouble could these banks be in.
Speaker 3: I think there's a general sense, even irrespective of commercial
Speaker 3: real estate, was that there might be too many banks
Speaker 3: in the US. You know, there's like forty five hundred
Speaker 3: banks or you know, we're real estate reporters, not necessarily
Speaker 3: banking experts, but we certainly hear people say over the
Speaker 3: next couple of years, with commercial real estate debt as
Speaker 3: a catalyst, hundreds, if not thousands of banks are going
Speaker 3: to go away, either because the go out of business,
Speaker 3: or they need to be swallowed up, or they need
Speaker 3: to join forces with another weak bank to survive. It's
Speaker 3: certainly one that our newsroom is really keyed in on
Speaker 3: to see how this plays out.
Speaker 2: And so this is mostly a problem for these smaller
Speaker 2: and regional and mid size banks.
Speaker 3: It's a bigger problem for them, you know. I mean,
Speaker 3: if you're JP Morgan and you you have all of
Speaker 3: these different businesses that generate revenue for you, and your
Speaker 3: commercial mortgages are a much smaller percentage of the assets
Speaker 3: on your balance sheet, and so if those assets wind
Speaker 3: up getting you know, turning out to be worth seventy
Speaker 3: cents on the dollar, you're still you know, I'm not
Speaker 3: saying that's the case there, but you can come back
Speaker 3: from that. Whereas you know, if you're a regional bank
Speaker 3: in Tulsa and you know you've got a few bad
Speaker 3: office loans, like that could wind up being a really
Speaker 3: big deal for you.
Speaker 2: I guess like there are winners and losers here right A.
Speaker 2: Who are the winners?
Speaker 1: There's a lot of people out there that are flushed
Speaker 1: with cash. Some of the buildings that we talked about
Speaker 1: were in distress, you know, the owners that walked away
Speaker 1: from it. Like Blackstone just closed a record breaking property
Speaker 1: fund last year. They have more than thirty billion dollars
Speaker 1: in capital commitments and they're actively out there looking to
Speaker 1: invest that money in real estate. They were the buyers
Speaker 1: of the largest chunk of that failed Signature Bank. Commercial
Speaker 1: real estate loans and they were the buyers behind that.
Speaker 1: So you have them walking away from this one off
Speaker 1: office building that they rode off two years ago on
Speaker 1: Broadway in New York City. But on the other hand,
Speaker 1: they're deploying billions of dollars into other real estate opportunities, right,
Speaker 1: So they're still bullish on a sector.
Speaker 3: I think you can also take solace in the creative
Speaker 3: destruction aspect of it. Like, the reason why these office
Speaker 3: buildings are not worth as much is because they're functionally
Speaker 3: obsolete or largely obsolete, and we shouldn't try to hold
Speaker 3: on to that, right, commuting sixty minutes, ninety minutes whatever
Speaker 3: to go sit in a dreary office building, you know,
Speaker 3: with bad fluorescent lighting and you know, one of those
Speaker 3: sort of Warren of cubicle type things like why say that?
Speaker 3: Who was that good for? So I think it's not
Speaker 3: all bad when things age out of usefulness, we have
Speaker 3: something else that's better now.
Speaker 2: Well, Natalie Patrick, thank you so much for being here
Speaker 2: and sharing your reporting. Thank you, Thank you, thanks for
Speaker 2: listening to the Big Take from Bloomberg News. I'm Sarah Holder.
Speaker 2: This episode was produced by Alex Suguiera. It was edited
Speaker 2: by Caitlin Kenney and Kara Wetzel. It was fact checked
Speaker 2: by Stacy Renee. It was mixed by Alex Suguiera. Our
Speaker 2: senior producers are Naomi Shavin and Jill Diddy Carly. We
Speaker 2: get editorial direction from Elizabeth Ponso Nicole beemsterbor is our
Speaker 2: executive producer. Sage Bauman is Bloomberg's head of podcasts. Thanks
Speaker 2: for listening. We'll be back next week.