Price Discovery Equals Short Sales

Authored by Douglas French via The Mises Institute,

Price discovery in commercial real estate, which had been frozen while sellers insisted on prices from the good ol’ ZIRP days, is starting to thaw. Real estate giant Related Companies has unloaded the property at 321 W. 44th St., New York City, for less than $50 million, reports Bloomberg.

Not only is that a 67 percent discount from the nearly $153 million that Related Fund Management paid for it in 2018, but also, the lenders, including Canadian Imperial Bank of Commerce, agreed to a “short sale.” For those who have forgotten 2008 or were too young, a “short sale” is when the lender agrees to a property sale for less than the outstanding amount on the mortgage. The owner loses everything, and the lender takes a large loss. In this case, the repayment to the lenders was more than cut in half as the property’s mortgage exceeded $100 million.

Another recent office building sale had Blackstone and its lender agreeing to sell 1740 Broadway for $186 million. Blackstone Inc. bought the building in 2014 for $605 million.

Pacific Investment Management Company (Pimco) expects more regional bank failures due to a “very high” concentration of troubled commercial real estate (CRE) loans on their books, Bloomberg reports.

John Murray, the head of Pimco’s global private commercial real estate team, told Bloomberg’s Laura Benitez that “the real wave of distress is just starting” for lenders to everything from malls to offices.

Ms. Benitez writes, “Contrary to some market expectations, larger banks have been disposing of some of their higher quality assets first to avoid deeper losses, according to Murray.”

That means banks are selling their best assets because they can receive prices at least equal to what they are carrying in loans on their balance sheets. There is no other reason to sell good loans but to generate liquidity.

“As stressed loans grow due to maturities, however, we expect that banks will start selling these more challenged loans to reduce their troubled loan exposures,” Mr. Murray said. Banks will take losses when these loans are unloaded, impairing capital and in some cases leading to bank failures.

Ms. Benitez writes, “The turmoil has been particularly felt among regional banks, which boosted their CRE exposure that in many cases is now worth only a fraction of their value at their peak.”

Not only are banks carrying a collective half a trillion dollars in unrealized losses on securities portfolios, but also, as Ms. Benitez explains, bank commercial real estate loan books are underwater as well.

“The combination of rising rates plus recessionary pressures creates real challenges for commercial real estate, from both a capital markets and fundamentals perspective,” Mr. Murray said.

Real challenges for the banks holding the paper as well.