Bank Failures Explained: Questions, Answers and How CRE Fits In
How will the lending environment shift because of the bank issues?
It will get tighter, but it was already tight. In the second half of 2022, nearly every CRE lending group began to pull back (i.e., most banks, CMBS, life companies, etc.). Given that inflation remained stubbornly elevated, the Fed was raising rates and recession risks were going higher. Pricing risk became increasingly difficult, so lenders largely headed to the sidelines. That isn’t to say the debt markets weren’t functioning, but they were largely focused on high quality assets, which to a large extent overlapped with favored property types like industrial and multifamily—although some rebound in the experiential/services economy helped retail and hotel to rebound on a market share basis. It’s impossible to have a counterfactual of what CRE lending would look like without SVB, but we know that lending standards by banks had tightened dramatically in the run up (no pun intended!)
to recent issues. How can we gauge marginal changes in how risk is being perceived for CRE borrowers? Well, for risk-adjacent Baa corporate bonds, the spread over the 10-year Treasury note jumped from 184 bps on March 9 to 226 bps (the latest peak) on March 23. Since then, it’s come in to around 210 bps. So, let’s call the risk spread out by about 25 to 30 bps post-SVB. Corporate bond spreads are only one piece of the puzzle. Going forward, we will be carefully monitoring many aspects of the debt markets, including CMBS since this was an important source of shorter term, floating rate loans leading up to this year and with higher exposure to the office sector, and because CMBS spreads have behaved differently in recent weeks compared to corporate bonds. On the banking side, the Q1 2023 results from the Fed’s Senior Loan Officer Opinion Survey will also be informative in gauging debt availability.
Bank Failures Explained - Questions, Answers and How CRE Fits In
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