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  • Writer's pictureKyle Nagy

Fire Sale in loans or properties? Already, why?

Fire Sale of Failed Bank Assets Speeds Plunge of CRE Values Eye catching headline, are we talking about CRE Bonds (Loans) or CRE Properties? If you do not have time to read the entire article, please allow me to extract and apply the relevant.


"With interest rates still rising, prices retreating and credit evaporating—and a stressed-out banking system moving to shore up balance sheets—expect more fire sales of older CMBS loans and an acceleration of plunging CRE values in markets across the US."


Fire Sale in loans or properties? Already, why?


"A fire sale of CMBS loans was lit as $72B in assets from the failed Silicon Valley Bank (SVB) were sold, including about $13B in real estate exposure and at least $2.6B worth of CRE loans—were sold at a discount of $16.5B, which translates into about 77 cents on the dollar."


77 cents on the dollar for CMBS loans, not CRE. Well, at least we set a floor.


"The Federal Deposit Insurance Corp. has lit a fuse on an even larger fire sale of assets—a bonfire in terms of CRE loans—for NYC-based Signature Bank. The 77 cents on the dollar benchmark established by the SVB sale likely will be the top end of where prices are heading, the experts say."


Top end, does everyone agree?


"Experts who specialize in pricing CRE loans believe a discounted sale as large as the disposal of Signature’s assets will speed a markdown of valuations by banks who until recently have been reluctant to set off a downward spiral."


How did this happen?


"What everybody has been operating under is this hold-to-maturity veneer, referring to banks that have continued to value loans at 100 cents on the dollar, known as par. In the wake of the SVB asset sale, there’s just no way these things get resolved at par, the write-down is kind of implied.”


Prior to recent events, "the rising cost of debt was (already) cutting into the value of older, low-coupon loans."


One last opinion, "a recent advisory from Cohen & Steers estimates the decline in values will likely be at least 25%."


Please remember, most of the value and price references are to loans, not CRE. However, if banks are forced to write down their long term CRE bonds or investments, they will incur additional stress. Institutions under stress do not lend and we cannot have a healthy CRE market without affordable debt.



 

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