Pimco warns of more regional bank failures due to real estate woes

(Bloomberg) — Pacific Investment Management Co. expects more regional bank failures in the U.S. due to a “very high” concentration of distressed commercial real estate loans on their books.

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“The real wave of distress is just beginning” for lenders of everything from shopping malls to offices, John Murray, head of Pimco’s global private commercial real estate team, said in an interview. Its division is part of Pimco’s $173 billion alternatives business.

Uncertainty over when the Federal Reserve might cut interest rates has exacerbated the challenges facing the residential real estate sector, where high borrowing costs have driven down valuations and triggered defaults, leaving lenders stuck with assets that are difficult to sell. Contrary to some market expectations, big banks sold off some of their higher-quality assets first to avoid bigger losses, according to Murray.

“As stressed loans increase due to maturities, we expect banks to start selling these more stressed loans in order to reduce their exposures to stressed loans,” he said, adding that his team had been recovering CRE loans sold by some major US banks all along. Last 18 months.

The turmoil has been particularly felt among regional banks, which have increased their exposure to CRE which in many cases is now worth only a fraction of their value at their peak. Smaller banks also continue to worry investors after a few failed last year.

Earlier this year, New York Community Bancorp shocked investors by slashing its dividend and stockpiling more cash for potentially bad loans, sending shares tumbling and resulting in a capital infusion. US Bancorp, the region’s largest bank by assets, increased its provisions for credit losses in the first quarter. Shares of Axos Financial Inc. fell last week after a short seller took aim at what he called “glaring” problems with the bank’s home loans.

Regional banks have also been the only lenders not to require additional down payments from commercial real estate borrowers in recent years, highlighting their vulnerability to falling values, according to a report released by MSCI Real Assets in March. Depository institutions are facing a wall of maturing real estate debt this year, estimated at $441 billion.

For big banks, real estate exposures are unlikely to cause systemic failures as their CRE lending was limited after the 2008 crisis, Murray said. But borrowers’ inability to repay means they are lending even less than in 2021 and 2022, he added.

Meanwhile, many mortgage REITs have become increasingly marginalized as they face their own problems. This limits their ability to secure new investments. Starwood Real Estate Income Trust boosted its shareholders’ ability to withdraw money last month in a bid to preserve cash and avoid asset sales, while Blackstone’s $59 billion real estate trust Inc. has seen an uptick in takedown requests.

Loan volumes for large…

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