CRE lending. Seems to be gaining attention as to risk in the system. While the Financial Times implies a game of chicken with the Fed on inflation, perhaps CRE could be a bigger risk in credit. "This divergence has driven a lot of talk about either the market calling the Fed's bluff or the Fed making a mistake. We don't see it this way: instead, this is a case where different kinds of actors, with different priorities, behave differently. The Fed is saying "inflation is still way too high, and we will continue to tighten until we see more evidence of a deflationary slowdown," and the market is saying "we bet that evidence is just about to appear" "We can think of three ways to frame the fear. (on CRE) " "First, CRE hurts regional banks. Falling office occupancy and rising interest rates depress property valuations, creating losses for the regional banks that do the majority of CRE lending (see Friday's letter)" "Second, regional banks hurt CRE. Stricter lending standards post-SVB deprive commercial property borrowers of reasonably priced credit, crimping their margins and pushing up defaults" "Third, both hurt each other, and the whole thing becomes a horrible, ugly downward spiral." "The inflation problem looks less severe than in the run-up to the S&L crisis, meaning rate cuts can still intervene if and when inflation comes under control. Other lenders, like CRE-focused investment trusts or private equity funds, could also offset the shrink in regional bank lending. Or perhaps the unwinding will be sufficiently slow-moving that regional banks can muddle through." "Of the $400bn in loans coming due this year, less than $50bn sits directly on regional banks' books. Though regional banks did a boatload of CRE origination in 2021-22, those loans won't mature for years (see, eg, the light blue bars in 2026-27)" "Costello adds that distress levels, even for office properties, remain modest, though they are climbing. This suggests that the regional banks have some breathing room, and the longer they can stall, the more time for rate cuts to ride to the rescue." #banks #cre #creditunions #office #smallbusiness #credit #lending #banking https://lnkd.in/dq9R4mTN
