Can you imagine that you pay your loan on time, and it still gets pulled, sold or cancelled? There are factors that our commercial construction projects could be in jeopardy considering we are dealing with different pressures the construction cycle has not seen.
Federal Reserve Chair Jerome Powell has confirmed that the FDIC is monitoring the commercial real estate crisis at hand. In March, Signature Bank went under during the collapse of Silicon Valley Bank – with many claiming Signature went under due to poor management – but 45% of Signature’s portfolio was commercial real estate loans. Powell claims that CRE loans are well distributed across smaller banks and the system can take these losses, “It feels like something that will be around for some time, as opposed to something that will suddenly hit and work its way to systemic risk,” he said during his address this past week. Though Goldman Sachs estimates that lenders with less than $250 billion in assets hold around 80% of CRE loans.
The FDIC considers the commercial construction market as unstable with properties currently depreciating at a rate of twenty to thirty percent. With no sign of future improvement as companies like Meta, Lyft and Salesforce are going remote. On top of the inventory that is growing exponentially, property owners are starting to be delinquent on payments. Property owner PIMCO recently defaulted on $2 Billion in loans, followed by Brookfield with a total amount of $784 Million. Per Reuters.com, “More than $1.4 trillion in U.S. commercial real estate loans will mature by 2027, with some $270 billion coming due this year. Making matters worse, and compounding on global market concern is the fact that small lenders holding 70% of the loans in [the CRE] market.” PAC West Bank chose to get ahead of the curve, selling $2.6 Billion of loans at a loss, HSBC bank is trying to do the same.
So, what does this mean for new and existing projects for commercial contractors?
Industrial and multifamily subsectors seem to be holding steady, and as of now, reports are saying this “rush for a commercial exit,” is going slower than the crisis of 2008. Powell claims that, “It feels like something that will be around for some time, as opposed to something that will suddenly hit and work its way to systemic risk. Regulators are taking steps to emphasize risk management and examine exposures to CRE loans at their regulated institutions”. But are the regulators doing enough and where is the aid going to come from when these smaller banks need help?
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