While industry analysts report that many regional and community banks posted strong lending numbers at the end of 2022, the Financial Accounting Standards Board requires all banks to start putting reserves aside in the event of potential loan losses.
While the reserves are designed to improve banks’ risk-management procedures, they also cut into their profits. But another concern is being echoed in the commercial real estate (CRE) landscape — an expected rise of loan delinquencies if the economy slides into a deeper recession.
That warning from Fitch Ratings’ Jan. 31 report was echoed by bestselling business author, sales trainer, and CEO of the real estate investment firm Cardone Capital Grant Cardone, who warns that the bill for hundreds of thousands of apartments built with adjustable money and bridge loans is coming due.
“They are massive loans, not the size of a home loan. Rather than a $400,000 loan for a single-family home, we are talking about $40 million of debt with interest rates of 2.8% to 6.5%,” Cardone said. This puts “the operator and properties into a technical default, unable to cover its principal and interest per the loan documents and agreements.”
That concern has significantly impacted bank loan practices, with some holding off on CRE loans because of high interest and cap rates, leaving property owners scrambling to quickly find additional funds for current projects or refinance existing loans. Fourth-quarter 2022 loans for all U.S. banks grew 1.8% to a record $1.78 trillion compared to the previous quarter, according to Dallas-based BankRegData. Construction loans rose 4.6% to $467.7 billion.
“Regarding the CRE market (apartments, office and retail), if residential is in the freezer, the big boy stuff is going through an Arctic vortex that could become the biggest issue facing the real estate market since the 2008 housing bubble,” Cardone said.
Miami-based private real estate lender BridgeInvest Managing Partner Alex Horn made similar warnings last week when he told Benzinga, “The general sentiment I’m hearing from talking to bankers is that they’re lending significantly less this year because their depository relationships have shrunk with people taking money out of their accounts. The other issue is that people are sitting on their current fixed-rate loans and are not refinancing.”
In turn, CRE investors are also now looking at the relative certainty of real estate debt as a popular alternative investment class, according to a survey by CBRE.
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