Silver linings playbook: CRE edition
Office apocalypse
Value declines
Maturity walls
Bank failures
Despite reasons to chose optimism…
Office debt is dispersed and NOIs remain relatively elevated. The share of loans previously considered to be bulletproof but backed by office loans is relatively small.
20-25% peak-to-trough declines aren’t nearly as bad as historical crises, e.g., S&L, GFC, and move average LTVs from 65% to 90%.
“Kicking the can” may alienate those wanting distress but remains a favored (and generally viable) strategy. Borrowers are staying alive since there’s equity to protect.
Bank implosions have been idiosyncratic, and as long as borrowers continue to pay, it’s hard to see widespread failures.
—— Historical insight: CRE-CDOs ——
So what does it take to shake the real estate system?
Let’s look back at what a leading credit rating agency (Moody’s) was presenting on the eve of the GFC.
How to turn pools of real estate loans that generally have a coin toss’s chance of survival into AAA/bulletproof bonds…
Huge runup in activity
+ incredibly low credit quality
+ magic math
= AAA bonds
Most of these loans imploded. Leverage on leverage, collateralized by properties at all-time-high valuations, was the rule not the exception.
This time is different.
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