PPCC: Pisitófilos Creditófagos. Invierno 2024

[Derby]

https://www.reuters.com/technology/cisco-lay-off-5-workforce-2024-02-14/

Cisco to cut more than 4,000 jobs, lowers annual revenue forecast

[senslev]

Lo que tenemos dejó de ser capitalismo hace bastante, incluso me planteo si he llegado a vivir en ese sistema. Muchos indicios de la muerte del capitalismo, al igual que muchos indicios de la parada de la AMOC.

https://www.businessinsider.es/pasaria-europa-corrientes-oceano-atlantico-colapsan-1364209

Si pudiera darle a un botoncito y aparecer en 2030...

[Derby]

Los trabajadores no llegan, hay que compartir con ellos. Excelente apunte para alguien a punto de retirarse...

https://www.ft.com/content/d3770b32-e3b1-4ca8-bb96-69cbc4ff4110

Private equity should share more wealth with workers, says US pension giant

Calstrs investment chief says industry needs ‘to do a better job’ in sharing profits with employees of companies it buys

Private equity executives need to “share the wealth” they create with workers at the companies they buy, according to the investment head of Calstrs, the giant US pension fund that is one of the world’s biggest investors in the sector.

The comments from Christopher Ailman, outgoing investment chief at the $327bn fund, come after a decade of rapid growth in the buyout industry in which many dealmakers have made large fortunes from the hefty fees they have charged investors such as Calstrs.

The founders and top executives at groups such as Blackstone, KKR and Apollo Global Management have enjoyed a more than $40bn increase in the value of their shares since the beginning of last year, as the assets they manage continue to swell.

“Private equity has not shared enough revenues,” said Ailman, who pioneered Calstrs’ move into private equity two decades ago and now holds $50bn in the asset class, in an interview with the Financial Times.

“It’s great they make money for our retirees — who are teachers and for other funds,” he said. “But they need to also share the wealth with the workers of those companies and with the communities they invest in.”

Ailman’s comments come as the private equity industry faces increasing pressure from regulators, campaigners and investors due to its growing influence over the American corporate landscape and a series of scandals involving workers at businesses they own.

Private equity-backed companies in the US now employ 12mn people, according to lobbying group the American Investment Council.

Calstrs, which has increased the share of its fund invested in private equity from about 10 per cent in 2020 to almost 16 per cent today, has come under pressure from campaigners over its investments with Blackstone.

PSSI, a sanitation business owned by the private equity giant, was ordered to stop using child labour after a 2022 Department of Labor investigation.

Blackstone said that it “stands unequivocally against child labour violations — which are fully opposed to our values and PSSI’s own hiring policies”.

Ailman said the industry had “created a backlash” against it and “needed to do a better job”.

He added that Calstrs had been putting pressure on managers such as Blackstone behind the scenes over their investments. “We go directly to our general partners to have conversations, we just haven’t done that in the press,” he said.

Some private equity managers have taken steps to ensure that employees at companies they own can share in the profits, if the firm performs well.

New York-based buyout group KKR says that billions of dollars in equity have been shared between more than 60,000 employees at its portfolio companies since 2011.

Last year, the firm committed to offering equity-sharing programmes to all employees in the takeover deals coming from its $19bn North American private equity fund and in all future funds in the region.

More than two dozen buyout groups, including Apollo, TPG, Warburg Pincus and Advent International have committed to a plan called Ownership Works that aims to generate more than $20bn in wealth for workers by 2030.

Ailman’s comments come as returns for private equity investors have fallen sharply due to a combination of lower economic growth and higher interest rates, which raise the buyout industry’s cost of borrowing to take companies private.

“When I started we assumed that private equity would generate as much as 500 basis points over publics, then we lowered it to 300,” said Ailman, who has been chief investment officer since 2000. “I wonder if it is now more realistic to assume that private equity will only really generate around 150 basis points over publics.”

He added that fees “were high” and “needed to be lower”, but said that the net return was “still worth it” and that the fund was taking steps to reduce these costs.

Ailman’s comments come as he prepares to “pass the baton” to a successor from June after announcing his retirement last month.

One of his final acts has been to obtain board approval for a controversial $30bn of borrowing to help manage the fund’s giant illiquid portfolio. The move attracted concerns that the fund had become overweight with illiquid assets, which are not easily traded.

Ailman signalled that its private markets allocation, which includes assets such as private equity and real estate and which amounts to about 40 per cent of the portfolio, had peaked.

“I actually think we are at the right balance [between illiquids and liquids],” he said. “I actually think we have achieved the sweet spot of where you want to be.”

[Derby]

China lidera...

https://www.wsj.com/world/china/china-real-estate-crisis-state-housing-656c5093

https://www.msn.com/en-us/money/realestate/china-revives-socialist-ideas-to-fix-its-real-estate-crisis/ar-BB1ik6E0

China Revives Socialist Ideas to Fix Its Real-Estate Crisis

China’s massive property market is crumbling. Xi Jinping wants to revive socialist ideas about housing and put the state back in charge.

Home prices across China are falling, developers have gone bust and people are doubting whether real estate will ever be a viable investment again. The meltdown is dragging down growth and spooking investors worldwide.

Under the new strategy, the Communist Party would take over a larger share of the market, which for years has been dominated by the private sector. Underpinning it are two major programs, according to policy advisers involved in the discussions and recent government announcements.

One involves the state buying up distressed private-market projects and converting them into homes that the government would rent out or, in some cases, sell. The other calls for the state itself to build more subsidized housing for low- and middle-income families.

The goal, the policy advisers say, is to increase the share of housing built by the state for low-cost rental or sale under restricted conditions to at least 30% of China’s housing stock, from 5% or so today.

The plans line up with Xi’s broader push in recent years to expand party control over the economy and rein in the private sector. That push has included regulatory crackdowns on technology firms such as Jack Ma-backed Ant Group and more investment in state-owned enterprises in preferred industries such as semiconductors.

Beijing’s economic mandarins, led by Xi’s top economic-policy aide, Vice Premier He Lifeng, are still hammering out how to execute the real-estate strategy. Economists caution that the plan could take years to achieve—if it’s achievable at all.

The cost would be huge: potentially up to $280 billion a year for the next five years, or a total of around $1.4 trillion, according to some analysts.

Whether China wants to pay that tab—or even can—is a central question. Local governments in China are already burdened with colossal debt, and it’s unclear whether Beijing will be willing to bear the brunt of the funding burden.

Beijing has repeatedly disappointed analysts and investors over the past couple of years with insufficient or poorly executed measures to stimulate growth and clean up the housing mess. People who have examined some of the government’s plans say the strategy is also filled with complexities and contradictory aims that could make it difficult to fully implement successfully.

‘New model’

A December confab presided over by Xi made clear that a priority for 2024 is to speed up development of what authorities call “a new model” for the real-estate sector. The model should focus heavily on state-provided affordable housing, according to an official account of the meeting.

Initial plans call for adding six million affordable housing units in the coming five years, government documents show.

The People’s Bank of China has set aside 500 billion yuan, or roughly $70 billion, in low-cost financing to policy banks to help get the strategy rolling. A handful of projects funded with that money are under way.

The State Council Information Office, which handles inquiries for China’s leadership, didn’t respond to questions.

Xi is adamant that real estate, which for years propelled China’s growth and at one point made up around a quarter of gross domestic product, should no longer take on such an outsize role in the economy, the policy advisers say.

In Xi’s view, too much credit moved into property speculation, adding risks to the financial system, widening the gap between the haves and the have-nots, and diverting resources from what Xi considers to be the “real economy”—sectors such as manufacturing and high-end technology that he sees as crucial for China in its competition with the U.S.

In some ways, Xi’s plans would take China’s housing market back to its roots. Decades ago, in the Mao Zedong era, the party controlled the market, with most Chinese people living in homes provided by their party work units.

In the late 1990s, when leaders started liberalizing the market, they initially envisioned a two-tiered system in which some people would buy privately developed properties, while others would live in state-subsidized housing.

Over the following decades, however, private developers like China Evergrande expanded rapidly and increasingly dominated the market. Today, more than 90% of Chinese households own their own homes, compared with around 66% in the U.S.

The shift to private ownership created enormous wealth in China. But the market’s explosive growth also sparked a debt-fueled bubble, priced many young families out of desirable housing, and dismayed Xi and other senior leaders who felt the country was straying too far from its socialist roots.

With the market plunging into turmoil last year following a yearslong government campaign to rein in excess property investment, economists inside and outside China called on Beijing to take more assertive steps to restructure the sector.

There are now millions of empty units across China and many buildings in need of financial support.

In internal policy discussions, Vice Premier He, one of Xi’s most trusted lieutenants, argued that getting the state more involved would be a way for the government to absorb excess home supply, put a floor under falling prices and help protect banks from having to write down hundreds of billions of dollars of property loans if the market kept getting worse.

Another selling point, according to the advisers: By converting more private properties to state-subsidized housing for rent or sale, it could help advance Xi’s oft-repeated “common prosperity” goal of making Chinese society more equal.

Document 14

The new strategy started coming into sharper focus with a central-government directive issued in October, dubbed Document 14. It called for adding some six million affordable-housing units in 35 cities with more than three million people each over the next five years.

The document disclosed few details on how to implement the plan. But it specified that the government would place restrictions on who can buy any units that are offered for sale, and would forbid those units from being traded on the open market.

The PBOC, China’s central bank, has since allocated 70% of the roughly $70 billion it is making available to three policy banks, China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China, PBOC disclosures show.

China Development Bank disclosed on Dec. 19 that it had granted a line of credit totaling 202 million yuan to the city of Fuzhou to build an affordable housing project. Upon its completion, expected in 2026, the project will have some 701 housing units, which the local government plans to sell to modest-income families at discounted prices.

The bank also extended a 10 million yuan loan to the government of Hunan, a province south of the Yangtze River, to develop government housing in a rundown inner-city district, according to information from the Hunan government.

It’s unclear how much of those funds would be used to develop new projects or to purchase and repurpose existing properties from commercial developers. The bank and Hunan’s government didn’t respond to requests for comment.

In early January, the central bank and the government’s top financial regulatory body, the National Administration of Financial Regulation, followed up with new guidelines pledging unspecified financial support to government-subsidized rentals. The guidelines said state funding would help “revitalize existing housing stock.”

Vice Premier He laid out some of the government’s plans to U.S. business representatives, including Wall Street executives, when he visited San Francisco last November with Xi.

During a meeting on the sidelines of Xi’s summit with President Biden, He focused on the government-subsidized housing plan, telling the American executives it will help people in big cities afford housing, according to people familiar with the matter.

The discussion suggested that Chinese leaders are concerned about how foreign investors view the government’s response to the housing problem, and how they have been selling off Chinese equities and bonds in recent months, some of the people said.

But He didn’t have anything to say on steps that many foreign bankers and investors have urged, such as restructuring cash-strained private developers or completing construction of millions of homes people in China already paid for but never received because their developers ran into financial trouble. He’s half-an-hour-long monologue failed to impress, the people say.

To the International Monetary Fund and some other economists, Beijing’s most urgent task is to come up with a comprehensive plan to assist financially distressed developers with debt restructurings and to get banks and other stakeholders to take losses—moves that, while painful, would restore public confidence in the market.

Beijing remains reluctant to offer direct liquidity support to developers, however, because officials are worried about reinflating the housing bubble that Xi is bent on deflating, policy advisers involved in discussions say.

Buying properties and converting them to rental units raises many complexities, including whether the government should pay current market values—in effect bailing out developers or individual homeowners who can’t make debt payments—or insist on steep discounts. It’s also unclear what should happen if owners don’t want to sell.

New construction for affordable housing is more straightforward, economists note, and would have the added benefit of propping up China’s construction industry. But expanding new construction would also add more supply at a time when China’s population is shrinking. The IMF expects fundamental demand for new housing to drop by almost 50% over the next decade.

Some Chinese officials have argued that the country’s economic downturn could provide an opportunity for the government to swoop in to buy more properties at a lower cost, making it easier to give priority to conversions of existing properties.

‘Wealth distribution’

Michael Pettis, a finance professor at Peking University, says that if the government does significantly improve affordable housing, “it will represent the kind of transfer to the poor households that China urgently needs,” freeing people to spend more on other things. But he said it was too early to know how the plan would play out.

Zhiwu Chen, a finance professor at the University of Hong Kong, was more skeptical. He compared China’s new housing strategy to the way Beijing uses its so-called “national team” of state funds to buy equities to try to prop up the depressed stock market.

Such efforts have often failed to sustainably bolster the market. Using government money to buy up distressed real estate would be no different, he said, given the country’s demographic challenges and supply glut.

Government interventions could also raise uncomfortable questions about social fairness, he said. Buying properties from existing homeowners or developers when the market is weak would amount to using national resources to subsidize owners who have the flexibility to sell, when others don’t, he said.

“It turns into an issue of wealth distribution,” he said. “Not everyone in China owns multiple apartments, nor are they ready to sell.”

Past efforts to support or re-engineer the market with government support have met with mixed results.

Over the past couple of years, a few Chinese cities, including Zhengzhou in central China and Suzhou, near Shanghai, have implemented their own programs to buy a few thousand unsold properties from developers and then convert them into affordable housing for low-income families, including farmers displaced by urban development.

According to analysts from China Real Estate Information Corp., the cities tended to buy from state-backed developers or those controlled by local governments, typically at below-market prices.

Those programs, economists say, helped absorb excess housing but also further strained local finances. Attempts to reach the cities for comment were unsuccessful.

Another notable previous push for social housing was a “slum clearance” initiative launched nearly a decade ago, when China’s property market was last in distress.

Under that program, the central bank provided low-cost funds to state-owned banks, which then made loans to developers to purchase land from cities and townships and then build more housing units. Those local governments, in turn, doled out cash subsidies to families dislocated from slum-clearance efforts so they could purchase the new units on the open market.

The initiative helped restore demand for real estate but led to more construction, worsening China’s housing glut.

Today’s housing crisis is much more severe than the last downturn, economists say, leaving the government with an even bigger challenge to clear up the mess.

[Derby]

https://twitter.com/Barchart/status/1757941004802351124

@Barchart S&P 500 is the most concentrated it’s been in 50 years and is approaching an all-time high.  This is fine right?

[CHOSEN]

Yo diría que lo que ha fracasado es el Estado, en su labor de implantación y mantenimiento de un sistema socioeconómico generador de prosperidad.
En esencia, el Estado ha permutado en organismo ANTISISTEMA.

En 20 años veremos que dicen y hacen los jóvenes criados por los grandes perdedores de esta sociedad decadente (sus padres, que entonces tendrán 50).
Para mí es evidente.

[Derby]

¿Qué es primero: el huevo o la gallina?

https://www.msn.com/en-ca/money/finance-real-estate/canada-warned-skilled-trades-shortage-poses-headwind-to-home-building/ar-BB1ikSO8

Canada Warned Skilled-Trades Shortage Poses Headwind to Home Building

OTTAWA—Canada’s bid to kickstart the construction of millions of houses to address an affordability crisis faces a sizable obstacle: a shortage of workers to build abodes.

The warning was conveyed late last year to senior officials at Canada’s finance department in a memo that was obtained by The Wall Street Journal through the country’s access-to-information laws. Among the key concerns raised is that apprenticeships for skilled trades fell to a decade-plus low.

To date, Canada has introduced a temporary tax break to encourage builders to start housing projects, and offered municipal governments billions of dollars to change zoning laws to allow more density. The memo indicates policymakers must confront the challenge of securing enough bricklayers, carpenters, roofers and others to ensure enough workers to erect homes and apartments.

Canada Mortgage and Housing Corporation, the federal housing agency, has said the country requires upward of five million new residences by the end of the decade to bring housing to affordable levels—defined as requiring less than a third of pretax income to cover shelter costs.

The eight-page, heavily redacted memo from analysts at Canada’s finance department said policy measures, such as the tax break and money for municipalities, mark positive developments in encouraging new-home construction. And they note that housing starts, while down about 3% from the prior year, were 22% higher than prepandemic levels.

Looming in the background is a labor shortage. The memo, citing other government research, indicates the share of workers between 15 and 24 years of age in residential construction is lower than the cohort’s share of the total workforce. The average completion rate for a carpenter apprenticeship is only 38%, it said.

“The growth in employment in the construction industry has not been driven by ‘skilled’ labor,” the memo said, adding that apprenticeships in the construction trades have dropped below 2010 levels. “Recruiting and retaining skilled labor has been cited as a major challenge by the industry.”

Kevin Lee, president of the Canadian Home Builders Association, said the government’s goal to reach upward of five million new residential units requires, at a minimum, a doubling of annual housing starts, which in 2023 reached 223,000. Yet, he said, his members already struggle to find skilled tradespeople, leading to housing-start completions to run about 11 weeks behind schedule during busy peak periods. Industry data indicate nearly a quarter of home-building workers will retire by the end of 2031, requiring companies to recruit over 100,000 new workers to fill the gap.

“The labor shortage is going to get more critical later this year,” Lee said, in reference to a housing-sale recovery that is beginning to take shape.

A finance department official said the Liberal government annually transfers about 3 billion Canadian dollars, or the equivalent of US$2.2 billion, to the country’s provinces to help with skills training to alleviate labor gaps, including in the construction sector. The official added the government is working with provinces to remove internal barriers—such as license requirements in each of the country’s 10 provinces—that impede the movement of construction workers within the country.

Canadian officials have said the government’s aggressive immigration strategy is, in part, an effort to get workers to fill vacancies and gaps in sectors such as construction. But Lee and other immigration experts say Canada’s immigration system favors those with higher education levels and language skills. Efforts to bring in more skilled tradespeople through new initiatives have had little effect, they say.

“It’s not set up for bringing the type of workers we need to build more homes,” Lee said.

Data compiled by Statistics Canada help illustrate the shift. Between 1980 and 1990, nearly 9% of immigrants Canada admitted had an apprenticeship or trades certificate, while 6.5% had a master’s degree. For the period between 2016 and 2021, about 2.5% of newcomers admitted had apprenticeship or trade certificate, whereas almost 30% hold a master’s degree.

A spokesman for Canada’s immigration ministry said for the eight-year period ended Dec. 31, 2023, Canada admitted over 44,000 permanent residents with work experience in trades occupations, and issued about 35,000 temporary work visas for workers in residential construction. Furthermore, the spokesman added that officials introduced initiatives in 2021 and 2023 aimed at attracting more skilled tradespeople.

[tomasjos]

La crisis del inmobiliario chino llega a Idealista
https://www.idealista.com/news/inmobiliario/vivienda/2024/02/15/811051-la-crisis-inmobiliaria-china-comienza-a-extenderse-por-todo-el-mundo

Por cierto, hablan de rebajas de hasta el....60 %

[Derby]

https://twitter.com/crescatkevin/status/1757868697530573139

@crescatkevin The technical setup compared to 1929 combined with the valuation and market cap concentration similarities should be top of mind.

[Benzino Napaloni]

La crisis del inmobiliario chino llega a Idealista
https://www.idealista.com/news/inmobiliario/vivienda/2024/02/15/811051-la-crisis-inmobiliaria-china-comienza-a-extenderse-por-todo-el-mundo

Por cierto, hablan de rebajas de hasta el....60 %

El Banco Central Europeo está preocupado por las entidades de la región, que podrían haber sido demasiado lentas a la hora de rebajar el valor de los préstamos.

Compañero, ojo con la droga dura, estás leyendo a Irrealista.

[Derby]

https://ritholtz.com/2024/02/cpi-shelter-measures-6-12-month-lag/

CPI Shelter Measures: 6-12 Month Lag



Last month, I mentioned that CPI inflation measures were based on lagging BLS measures of Owners’ Equivalent Rent (OER).

BLS highlighted housing prices, headlining the CPI report* as “CPI for all items rose 0.3% in January; shelter up”

As the chart above shows, Shelter was 2/3rds of the increase in the most recent. (Chart thanks to Michael McDonough).

We all know OER lags real-world prices — I used to spitball this at 3-6 months. But this week’s podcast guest, former NY Fed President Bill Dudley, tells me the lag is closer to 6-12 months. So BLS uses a measure of shelter for its inflation calculation that might actually lag behind actual prices by as much as a year.

That puts this week’s big sell-off into proper perspective. It was a reaction to data that was either old or very old. It would not surprise me to see that as people figure this out, we claw back that sell-off over the next few days or weeks.

The ever-present question: How much does the FOMC recognize how behind the curve this data is?

*https://www.bls.gov/news.release/cpi.nr0.htm

[Derby]

https://www.bloomberg.com/news/features/2024-02-14/real-estate-lenders-confront-falling-us-commercial-property-prices

The Brutal Reality of Plunging Office Values Is Here

Commercial-property deals in the US are starting to pick up — at deep discounts that are forcing lenders around the world to brace for souring loans.

The shakeout in the $20 trillion US commercial real estate market has long been delayed for a simple reason: No one could figure out just how much properties were worth. And, more crucially, few wanted to.

Since the Covid-19 pandemic upended the use of real estate around the world, lenders have had little incentive to get tough on borrowers squeezed by soaring interest rates and take on loans that had lost value. Transactions ground to a halt as potential sellers were unwilling to unload buildings at distressed prices — an outcome that allowed them to pretend that nothing had fundamentally changed.

For many, the time to wait it out is nearing its end.

Across the country, deals are starting to pick up, revealing just how far real estate prices have fallen. That’s spurring widespread concern about losses that can ripple across the global financial system — as underscored by the recent turmoil unleashed by New York Community Bancorp, Japan’s Aozora Bank Ltd. and Germany’s Deutsche Pfandbriefbank AG as they took steps to brace for bad loans.

In Manhattan, brokers have started to market debt backed by a Blackstone Inc.-owned office building at a roughly 50% discount. A prime office tower in Los Angeles sold in December for about 45% less than its purchase price a decade ago. Around the same time, the Federal Deposit Insurance Corp. took a 40% discount on about $15 billion in loans it sold backed by New York City apartment buildings.

It’s a turning point for the market as the Federal Reserve ends the fastest pace of interest-rate hikes in a generation — providing more clarity to real estate investors on where borrowing costs stand. Some property owners will have little choice but to sell as their debt come due: More than $1 trillion in commercial real estate loans are set to mature by the end of next year, according to data firm Trepp.

The fallout stands to reverberate widely. In the past decade of rock-bottom rates, global investors piled into offices and other commercial buildings as a perceived safe alternative to bonds. American cities from Los Angeles to New York have counted on top-dollar office values to help fill their property-tax coffers. And lenders — particularly US regional banks — are loaded up on loans for buildings that are now worth a fraction of their initial price.

Eventually, they’ll be left with no choice but to grapple with the black hole on their balance sheets and the ramifications of recognizing reality.

“Things can’t just sit forever,” said Josh Zegen, a co-founder of Madison Realty Capital. “If you have some trades, and values are coming down, that’ll force some of the mark-to-value conversations.”

The magnitude of the crisis is up for debate. Treasury Secretary Janet Yellen said last week that losses in commercial real estate are a worry, but that the situation is “manageable,” a similar sentiment expressed by Fed Chair Jerome Powell in a 60 Minutes interview on Feb. 4. Others have more dire outlooks, with real estate investor Barry Sternlicht predicting $1 trillion in office losses.

As more transactions add transparency to the market, investors will have to recapitalize loans to reflect lower values, said Scott Rechler, chief executive officer of New York landlord RXR. His firm defaulted on a $240 million loan tied to a lower Manhattan tower last year after determining it wasn’t worth putting more money into it. But it has also formed a venture with Ares Management to potentially snap up distressed properties.

Rechler compared the market’s pain to the five stages of grief, which start with denial, anger, bargaining and depression.

“In 2024, we’re at that fifth stage of grief,” he said. “People are now in acceptance.”

Extend and Pretend

For years, lenders have employed the so-called “extend-and-pretend” strategy, focusing on lengthening loan terms during periods of turmoil while ignoring short-term valuations. It worked well during the pandemic, when they faced delinquent loan payments as offices, stores and hotels emptied out. It didn’t make sense taking giant cuts on loans, since it wasn’t clear whether the issues were just a short-term, pandemic-related blip.

Unfortunately for them, the crisis gave way to runaway inflation and eventually, a series of interest rate hikes that sent the paper values of buildings plummeting. The problem is exacerbated across the office sector, which hasn’t recovered from record vacancies spurred by remote work. That issue is particularly acute in the Americas, where return-to-office metrics are lower than in Europe and Asia, according to real estate brokerage Jones Lang LaSalle Inc.

While prices for offices have tumbled in financial centers from London to Tokyo, US cities have seen particularly big declines. San Francisco, which for years benefited from booming demand from tech companies, had the country’s highest rate of available office space in the fourth quarter, at 37%, according to brokerage Savills. New York is faring better, with a more diversified tenant base including financial services, legal and media firms, but nearly a fifth of its office stock is available to rent.

Even as building values in those areas slump, prices would have to decrease more for transaction activity to reach normal levels, according to MSCI Real Assets.

The plunging US values are being felt around the world because properties in top-tier American cities were once magnets for global investment. Offices were seen as super safe bets backed by high-quality assets with long-term leases and rising rents. That’s now coming back to bite.

It’s why pockets of distress have cropped up in areas as far away from the US as Germany and Japan. As more loans near their maturity dates and investors write down properties or walk away, lenders across the world will have to stockpile more reserves to deal with possible losses. But exactly how this plays out for each company will largely depend on the qualities of each of their loans, meaning distress may pop up in different areas at a variety of times.

Germany’s Deutsche PBB and Aareal Bank AG have seen their unsecured borrowing costs climb as investors scrutinize their books for bad US loans. South Korean banks and asset managers, among the largest investors in European and US commercial buildings in recent years, are also bracing for a wave of problematic debt.

The issues have also hit Canada. Sun Life Financial Inc. saw the value of its US office investments plunge, with particularly pain around one San Francisco building. Pension fund CPPIB recently sold a stake in a Manhattan office tower for just $1, on top of the assumption of mortgage debt and working capital, according to a person familiar with the matter.
Mounting Distress

The distress traces back to issues stemming from Covid — like reduced office demand or apartments that were overbought in the pandemic frenzy at peak values — and is exacerbated by much higher borrowing costs.

As of December, offices accounted for 41% of the value of distressed US properties, which stood at nearly $86 billion, according to MSCI. Potential distress, which refers to the erosion of an asset’s current financial standing, is at nearly $235 billion across all property types.

Apartments are high on that list, with more than $67 billion in potential distress. More than 30% of that value is tied to buildings bought in the last three years, many at peak prices.

Apartment landlords are facing much different issues than office owners with a glut of space; there’s still a shortage of housing across most cities. Distress in the sector instead stems mostly from surging borrowing costs. After investors clamored into the market in the easy-money days of 2021, spiking interest rates took a bite out of building values, just as owners needed to refinance. Rent growth has flattened since then, as developers added new apartments at the fastest clip in generations.

Some lenders are already quietly trying to offload loan portfolios attached to real estate. Capital One Financial Corp. sold a large office loan portfolio last year, and was in the market with portfolios comprised of both performing and non-performing debt tied to offices and apartments in New York. Canadian Imperial Bank of Commerce is looking for buyers for roughly $316 million of loans tied to US properties, too.

Many banks still prefer to work out deals with existing landlords, such as offering loan extensions in return for capital reinvestments toward building upgrades. Still, that approach may not be viable in many cases; big companies from Blackstone to a unit of Pacific Investment Management Co. have walked away from or defaulted on properties they don’t want to pour more money into. In some cases, buildings may be worth even less today than the land they sit on.

“When people hand back keys, that’s not the end of it — the equity is wiped but the debt is also massively impaired,” said Dan Zwirn, CEO of asset manager Arena Investors, which invests in real estate debt. “You’re talking about getting close to land value. In certain cases people are going to start demolishing things.”

With all the headlines of doom and gloom, it’s easy to lose track of the fact that it’s still early. It's common for commercial mortgages to have five-year or 10-year terms that amortize on a 30-year schedule, leaving balloon payments that need to be paid off or refinanced when a loan comes due.

To a large degree, lenders have been willing to modify loans to avoid foreclosure for as long as possible, increasing the chances of finding better solutions. There’s still the chance office demand will improve or a borrower will gain enough confidence to inject new capital, particularly if the US is successful in avoiding a recession.

“I think if interest rates go down, which they’re supposed to, some of these guys are going to skate through this narrowly,” said Nicole Schmidt, managing partner of Oberon Securities. “The government isn’t interested in any kind of financial meltdown.”

Delaying also gives banks time to build reserves they’ll need to write down the value of troubled loans. Other lenders have shown a tendency to stretch things out as well. In the last cycle, delinquencies on commercial mortgage-backed securities peaked at more than 10% in July 2012, nearly four years after Lehman Brothers Holdings Inc. filed for bankruptcy protection. The current delinquency rates on securitized loans is 4.7%, according to Trepp.

Bank Reserves

Some banks have been stashing away extra cash to help insulate themselves from falling values and potential defaults. Wells Fargo & Co. had $3.9 billion set aside for potential commercial property losses at the end of last year, up from $2.2 billion a year earlier. U.S. Bancorp, the biggest regional bank by assets, increased its provisions for credit losses in the fourth quarter by $111 million — or nearly 28% — compared with the same period a year ago, a move partially driven by commercial real estate, it said.

Bigger banks can weather the turmoil more easily since they have built large reserves to deal with potential losses and can also rely on other large lines of businesses, like credit cards and investment banking. For smaller to medium-sized banks, the problems could be much greater.

Regional lenders account for 70% of the commercial real estate debt maturing through 2025 that’s on banks’ balance sheets, with the top 25 banks making up the rest, according to a Morgan Stanley report this week. The regulatory landscape for regional lenders also is changing, which could boost the cost of their liabilities and limit their ability to deploy capital, making them even more vulnerable, the company said.

As with any market dislocation, there’s opportunity: Potential buyers and investors have armed themselves with some $402 billion to target commercial real estate deals, according to JLL’s data as of October. Firms such as Blackstone, which had written off the Manhattan office tower at 1740 Broadway two years ago, are looking to put money to work. The world’s largest alternative-asset manager closed a record-breaking property fund last year after securing more than $30 billion in capital commitments.

In San Francisco, buyers are scooping up steep discounts. The downtown office tower 201 Spear St. was recently taken over at close to half of its value a decade ago after the previous owner turned the building over to its lender. On a square footage basis, the city’s office properties are selling at prices near those of market bottoms after the dot-com bust and the financial crisis, according to JLL.

Such deals may wind up looking like prescient purchases, but they're also potential bombshells on the balance sheets of lenders.

“You can’t ignore that anymore,” Rechler said of falling values. “Depending on the severity of it, we’ll see who has actually marked appropriately and who hasn’t.”

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