I work at a small midwestern CRE investment and development firm with locations in Chicago, Indiana, Nashville, Florida. Overall, credit has been tighter, but not screaming apocalyptic. We still have access to capital and relationships are solid. My guess is the focus on regional banks in total is the wrong lens. CRE is working great in the right geographies and asset classes because low supply, high demand. The problem will be big city financiers of multi-family/office and any fund that simply buys/sells CRE post-development/secondary market. So I guess my opinion is that you need to find the problem companies, and hope that it doesn't set off contagion. If not, regional banking sector will be fine once the bad companies are wiped out.
Hey Ryan, thanks for the color! Absolutely agree. It will be company-specific issues that emerge, a few bad actors will get hit, whole system will be fine. It helps that banks are enjoying nice margins still in their banking biz! Thx again
I posted it at Eli’s chart last week: “Just talked to a buddy of mine, he does private equity, non-traded. Some of the funds stop distributions and there is first “canary”, where fund NAV dropped almost 70% (given they do mostly offices) and they start hitting maturities later in the year and nobody want to refi. I talked to him back in March of last year and generally non-traded have 18 month of distributions on hands and maturities start later this year. And a lot of them will have to refi in 2025. It’s quite possible KRE got a head of itself and JP Diamond will just buy all those small banks for pennies on a dollar financed by US tax payers”
That CLO chart is interesting. I think what it relfects is the large number of PE funds that were chasing multi family in 2021 - buying 10-20 year old developments, pitching a 1-2 year value add strategy (re-do a bunch of apartments) and flip as cap rates continued to come down. Most were doing 3-5 year debt, floating (so they could flip more easily vs having penalties on fixed) and then doing 2-3 year int rate caps. I think a lot are either runing into maturities now, or as the first canary, their rate caps are running out and they are seeing big rate increases (beyond cash flow) and with cap rates backing up and limited buyers they can't sell. Some of these deals were being done with 75-80% leverage. There are buyers... but most waiting for what they anticipate being much better distressed levels in the next 12-18 months.
For sure I think the CLO's are first.... but hard to tell at this stage just how much of this crap is sitting on regional bank balance sheets. I am sure there will be a lot of extend and pretend going on. The other area for distress I think is going to be the BDC space - lending standards and risk management very different to the banks and of course a focus on borrowers that couldn't access funding via more traditional routes.
I work at a small midwestern CRE investment and development firm with locations in Chicago, Indiana, Nashville, Florida. Overall, credit has been tighter, but not screaming apocalyptic. We still have access to capital and relationships are solid. My guess is the focus on regional banks in total is the wrong lens. CRE is working great in the right geographies and asset classes because low supply, high demand. The problem will be big city financiers of multi-family/office and any fund that simply buys/sells CRE post-development/secondary market. So I guess my opinion is that you need to find the problem companies, and hope that it doesn't set off contagion. If not, regional banking sector will be fine once the bad companies are wiped out.
Hey Ryan, thanks for the color! Absolutely agree. It will be company-specific issues that emerge, a few bad actors will get hit, whole system will be fine. It helps that banks are enjoying nice margins still in their banking biz! Thx again
I posted it at Eli’s chart last week: “Just talked to a buddy of mine, he does private equity, non-traded. Some of the funds stop distributions and there is first “canary”, where fund NAV dropped almost 70% (given they do mostly offices) and they start hitting maturities later in the year and nobody want to refi. I talked to him back in March of last year and generally non-traded have 18 month of distributions on hands and maturities start later this year. And a lot of them will have to refi in 2025. It’s quite possible KRE got a head of itself and JP Diamond will just buy all those small banks for pennies on a dollar financed by US tax payers”
thx Den!
CLO? Seen a movie about it a while back… 🥸
So short $TSLA?
That CLO chart is interesting. I think what it relfects is the large number of PE funds that were chasing multi family in 2021 - buying 10-20 year old developments, pitching a 1-2 year value add strategy (re-do a bunch of apartments) and flip as cap rates continued to come down. Most were doing 3-5 year debt, floating (so they could flip more easily vs having penalties on fixed) and then doing 2-3 year int rate caps. I think a lot are either runing into maturities now, or as the first canary, their rate caps are running out and they are seeing big rate increases (beyond cash flow) and with cap rates backing up and limited buyers they can't sell. Some of these deals were being done with 75-80% leverage. There are buyers... but most waiting for what they anticipate being much better distressed levels in the next 12-18 months.
thx Jeremy! That's why probably most regional banks will be ok as they have waiting power vs some of these CLOs will be toast first I think!
For sure I think the CLO's are first.... but hard to tell at this stage just how much of this crap is sitting on regional bank balance sheets. I am sure there will be a lot of extend and pretend going on. The other area for distress I think is going to be the BDC space - lending standards and risk management very different to the banks and of course a focus on borrowers that couldn't access funding via more traditional routes.
Covid 19 killed American CRE.
Don't anyone try to tell me you saw that coming.
Great post!
Intersteing. Arbor has been my one short. Glad to see I am in good company.