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Comment by toomuchtodo | Hacker News Reader

> Small and midsized banks (those not among the top 25) currently hold 67.2% of all outstanding commercial real estate loans, Axios recently reported.

https://www.axios.com/2023/03/21/small-bank-struggles-could-...

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The thing is the average duration of those loans is ~5yrs, so the ~15-20% of the portfolio that needs to refinance this year was stuff that got financed five years ago, and probably has pretty decent loan to values given that the property values are in most cases up from where they were 5 years ago.

It’s the stuff that was financed in the past couple of years that is going to be the most risky, but unless rents fell off a cliff, has a bit of runway to play out.

Yea this sounded scary to me at first but now that I think about it does not seem all that bad.

If you were dirt rich it is probably a great time to be in the skyscraper buying market

Dirt poor. Filthy rich. I wonder where dirt rich fits on the scale. :-)

Dirt rich is untouched money. Collected for the sake of it. Filthy is what you get once you've touched it enough.

Are you making that up? Genuinely curious, as I'm agreed w/ parent you replied to on the "dirt poor / filthy rich" idioms.

Call it a (rare) creative whim!

Very well said. Indeed, I think we'll all mostly escape from this unscathed. We as in anyone who didn't take on massive leverage in the last few years to try to become rich off of the pandemic bubble or to try to live it up on cheap money. Jeff Bezos gave excellent advice recently on avoiding large purchases right now if you can, like cars and houses. I think he knows that borrowing costs will go down, and general costs will come down to pre-pandemic levels as things level off and the excess currency floating around in the system from (necessary) pandemic stimulus gets siphoned off by slightly higher interest rates.

Who knows, we may even see a scenario where the fed has extreme confidence in America's economic and military dominance globally and decides to reduce interest rates again once money supply is somewhat tightened again now that the pandemic has ended.

Jeff Bezos gave excellent advice recently on avoiding large purchases right now if you can, like cars and houses. I think he knows that borrowing costs will go down, and general costs will come down to pre-pandemic levels as things level off and the excess currency floating around in the system from (necessary) pandemic stimulus gets siphoned off by slightly higher interest rates.

Can you please share a reference to Jeff's advice. Curious of the context.

https://jalopnik.com/we-regret-to-inform-you-jeff-bezos-is-r...

"... stuff that got financed five years ago, and probably has pretty decent loan to values given that the property values are in most cases up from where they were 5 years ago."

Yes, that is the hope - and the narrative - but we're not talking about a minor correction here ... like a 10% haircut on building values. I suspect the current market for office space in SF is probably ~40% off and that's for class-A space.

"... but unless rents fell off a cliff, has a bit of runway to play out."

Rents have fallen off a cliff we're just pretending they haven't by refusing to lease the space at the prices the market would actually clear at. Building owners and management, etc., would rather have empty offices than establish new, lower rents by actually renting them.

If they did actually rent the space at the market clearing price they would all get margin calls from their banks because their loan to value (LTV) ratios would blow up and their loans have covenants specifically calling out the LTV.

This cannot last forever.

Eventually someone is going to rent space at the market rates and building owners in SF will either need to show up at their bank with a 5 or 10 million dollar check ... or with the keys to turn in.

I actually agree with you, but SF class A office isn’t representative of the commercial market that these banks lend into.

A lot of these loans are for a strip mall in Wichita, a suburban office building in charlotte, an urgent care clinic in Iowa, etc.

From what I've heard, certain real estate enterprises including a substantial portion of commercial real estate can get financing on their nominal asking rent, whether or not they actually have tenants paying that rent.

I'd imagine these enterprises still need to find a way to make their payments on any related loans, but one wonders what happens to banking revenue if a bunch of them get caught in the same crunch.

> I'd imagine these enterprises still need to find a way to make their payments on any related loans, but one wonders what happens to banking revenue if a bunch of them get caught in the same crunch.

I imagine the government will bail out commercial landlords.

> I imagine the government will bail out commercial landlords.

That hasnt happened before, why would it start now?

The government has developed a reputation?

Arguably, all the many useful real-estate-specific tools those investors have at their disposal to advantage themselves in the tax and accounting systems (a certain former prez's own dealings is an ok example) already amounts to a rolling permanent bailout that will no doubt cushion their losses without the government even needing to act.

> commercial landlords

A huge number of these are things like pension funds, unfortunately.

I have heard that, but I am skeptical. Who (... with money to lend) would be stupid enough to extend credit based on that? There has to be more to the story, if it's not fabrication.

Maybe I'm missing something but weren't there plenty of people "stupid" enough to invest in junk mortgage loans? So many that it ended up causing a crisis?

In that situation, everyone knew they were junk, but the ratings agencies gave them safe ratings when mixed in with others, and so “people” had plausible deniability to pass them off onto buyers who would not know betters

I’ve heard of a few buildings around herein Scandinavia (almost empty with businesses downsizing space as contracts lapse) who supposedly have this, and they can’t reduce rents because valuation would drop too much.

Yeah, they is risk in this type of lending. There's also risk in all lending, and managing risks is what banks do. This is less risky than many think on the surface. The major risk has to do with the asset class as a whole losing value, but that would be the same for any commercial property mortgage.

1. The asking rent has to close to actual market value. These small and medium sized banks have the local expertise to know what properties are actually renting for.

2. Tenets in commercial properties tend to stay around much longer than residential, and often a commercial property will stay vacant longer than residential property. The bank will want to see you have enough cash reserves to cover the loan payment for longer then they expect it to be vacant.

Ah, yeah, that (quasi?) price fixing function might be the extra piece of it.

I would need to see proof of this. When you go to get CMBS financing, you will be asked to maintain a certain debt service coverage ratio.

https://www.investopedia.com/terms/d/dscr.asp

Every month, an outside firm asks for the financials to confirm you are meeting the DSCR, otherwise you could be considered to have defaulted (even if the loan is being paid).

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