Mounting evidence shows commercial real estate coming under continual pressure from rising rates, which could create another major headwind for the US banking sector. Floating-rate mortgages have become much more common in recent years, threatening to bite investors if the Fed shifts toward a more aggressive rate hiking path.
Property market troubles have been most pronounced in vulnerable office properties, but some of larger and more diversified real estate trusts, which carry a relatively small amount of exposure to office buildings, are now facing rising bets against their portfolios.
Related ETFs & REITs: iShares CMBS ETF (CMBS), ProShares Short Real Estate (REK), Financial Select Sector SPDR Fund (XLF), SPDR S&P 500 ETF Trust (SPY)
Issues in the financial sector, most recently capped by First Republic Bank’s seizure at the hands regulators yesterday, have raised greater concerns around the commercial real estate space. As MRP noted in late March, commercial real estate and the commercial mortgage backed securities (CMBS) market plays a critical role in the performance of the US banking sector, considering mid-sized banks – lenders with less than $250 billion in assets – account for 80% of commercial real estate lending, according to Goldman Sachs data.
“Compared to big banks, small banks hold 4.4-times more exposure to US commercial real estate loans than their larger peers,” stated a new analysts report from JPMorgan Private Bank, highlighted by Reuters. “Within that cohort of small banks, CRE loans make up 28.7% of assets, compared with only 6.5% at big banks,” the report continued. Berkshire Hathaway’s Vice Chairman, Charlie Munger, noted in a recent interview with the Financial Times that banks were already pulling back from lending to commercial developers. “Every bank in the country is way tighter on real estate loans today than they were six months ago,” he said. “They all seem [to be] too much trouble.”
As several bank failures over the past two months have proven, smaller banks’ bond portfolios have already begun to crack under heavy duration risk and unrealized losses, stemming from…
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