We(don't)Work
We(don't)Work
Higher interest rates, an uncertain economy, and remote work pile pressure on office space owners
Financial Times
“Overdue commercial property loans hit 10-year high at US banks ”
https://www.ft.com/content/7518fea2-b2f2-4cad-8b58-c524764614cd
Delinquent commercial real estate loans at US banks have hit their highest level in a decade, as higher interest rates, an uncertain economy and the rise of remote working pile pressure on building owners.
Boyar’s Take: This week’s bankruptcy of WeWork is the latest twist in one of the craziest business stories of the past decade. It also serves as a classic example of how otherwise smart people (for example publicly traded landlords who allowed WeWork to become major tenants) and well-regarded investors (who continued to fund their expansion and once valued what is essentially an office subletting company at $47 billion dollars) can make some really dumb decisions (especially during periods of low interest rates). It was also another blow to the embattled commercial real estate sector, where the value of past-due loans where the landlord has missed more than one payment rose 30% in the three months ended September. While bank lending in general is fine, (just 1.5% of commercial property loans are past due) this is something certainly worth monitoring especially since the third quarter data cited above does not capture the WeWork bankruptcy.
The Bottom Line: Investors in bank stocks (who are lenders to commercial landlords, many of whom must navigate this challenging office market) should be paying careful attention. First it is very important to distinguish between the different types of commercial loans as commercial real estate lending encompasses a wide variety of different types of real estate (ranging from office buildings to industrial/warehouses to hotels). We believe the real problems will be in office loans due to the abundant supply of office space on the market coupled with tepid demand (not a good combination). The danger for stock market investors, in our opinion, is in the regional banks (not that they need any more problems!). According to American Banker, banks that have between $10 billion and $100 billion of assets have commercial real estate loans that accounted for 33% of total loans at the end of the 1st quarter, while for larger banks that number is just 12.8%. A firm such as Bank of America (who has certainly made other costly mistakes) currently has only 7% of its loan book tied to commercial real estate. So, for bargain hunters seeing value in the shares of regional banks (and we are sure there is some value out there), be cognizant of their commercial real estate exposure (particularly their office loan obligations). Either way: Caveat emptor.
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