Trouble for Banks is Not Just Trouble for Banks - The Time Has Come to Weigh Those Things
As many times as we’ve seen the phrase “regional banks are vulnerable to commercial real estate”, we’re just not sure that the bulk of the market really understands what that means. Today banks clearly trade like they’re in trouble. The S&P Regional Banks Select Industry Index is down close to 28% year to date while the S&P 500 is up nearly 14%. As we’ve mentioned before, there is very narrow leadership involved, but the aggregate is still interesting. What is being forgotten is how meaningful banks are to the general economy.
Nearly every day, we hear of a new office property where the investor has to hand the keys over to the bank in foreclosure. That of course surprises no one given the giant portion of the population that is working from home. But we’ve started to hear about new delinquencies in Industrial properties as well and very few people are talking about that because demand is still relatively high. Our concern is, whether through increased variable interest rates, structured interest only loans with balloon payments, or companies in need of refinancing, banks are going to have a difficult time extending credit in the same way they have for the last several years. The prices needed to maintain equity levels on nearly any asset are not justified when underwritten with massively higher interest rates. The only answer is for banks to slow lending. When they slow lending, businesses need to slow their business strategies and deployment plans. This is far from unique to commercial real estate.
For those that are heavily asset laden at the moment, this feels like a problem. For those of us searching for new opportunities, this is music to our ears. It may take time, but better prices are coming. If only the stock market knew that.
