Tag Archives: banks

Banks and “extend and pretend” for office properties

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With some companies and organizations falling behind on their commercial mortgages, some banks are waiting and looking for ways to get out of the loans:

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Some Wall Street banks, worried that landlords of vacant and struggling office buildings won’t be able to pay off their mortgages, have begun offloading their portfolios of commercial real estate loans hoping to cut their losses…

But these steps indicate a grudging acceptance by some lenders that the banking industry’s strategy of “extend and pretend” is running out of steam, and that many property owners — especially owners of office buildings — are going to default on mortgages. That means big losses for lenders are inevitable and bank earnings will suffer.

Banks regularly “extend” the time that struggling property owners have to find rent-paying tenants for their half-empty office buildings, and “pretend” that the extensions will allow landlords to get their finances in order. Lenders also have avoided pushing property owners to renegotiate expiring loans, given today’s much higher interest rates.

But banks are acting in self-interest rather than out of pity for borrowers. Once a bank forecloses on a delinquent borrower, it faces the prospect of a theoretical loss turning into a real loss. A similar thing happens when a bank sells a delinquent loan at a substantial discount to the balance owed. In the bank’s calculus, though, taking a loss now is still better than risking a deeper hit should the situation deteriorate in the future.

Four questions come to mind:

  1. How long will banks wait before aggressively working to drop these loans? It sounds like this is happening a little bit. Is there a possible tipping point? In other words, how much “extend and pretend” is doable?
  2. How much does this behavior toward commercial tenants reflect how the same lenders or other banks treat residential loan holders? If a homeowner is not making their mortgage payments, do they get treated the same? Is the issue more of the size of these loans and not necessarily what kinds of properties are involved?
  3. Given the foreclosure crisis of the late 2000s and the COVID-19 pandemic, is it safe to assume there are plans in place if banks need to move a lot of these loans at once? Who would benefit the most from aid to get out from under a lot of commercial property losses in a short amount of time?
  4. What happens to these vacant properties in the short and long-term? How quickly can they be filled by other uses? How do these vacancies affect the communities in which they are situated?

Regional banks and commercial real estate loans

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As companies reduce their office footprint, what institutions hold many commercial real estate loans?

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US banks hold about $2.7 trillion in commercial real estate loans. The majority of that, about 80%, according to Goldman Sachs economists, is held by smaller, regional banks — the ones that the US government hasn’t classified as “too big to fail.”

Much of that debt is about to mature, and, in a troubled market, regional banks might have problems collecting on those loans. More than $2.2 trillion will come due between now and the end of 2027, according to data firm Trepp.

Fears were exacerbated last week when New York Community Bancorp (NYCB) reported a surprise loss of $252 million last quarter compared to a $172 million profit in the fourth quarter of 2022. The company also reported $552 million in loan losses, a significant increase from $62 million the prior quarter. The increase was driven partly by expected losses on commercial real estate loans, it said.

Because I know little about this, this leads to several questions:

If patterns from earlier crises hold up, does this mean that when regional banks suffer difficulties they will be gobbled up by the larger banks?

What do regional banks have more of these loans – is this more of their specialty or they are more familiar with the local markets?

Who exactly decides which financial institutions are too big to fail and at what point might these regional banks qualify?

If these are the losses of just one regional bank, what might we expect throughout the entire US within the next few years?

Lenders and commercial properties that stay vacant for a long time

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Here is one explanation of why commercial properties in the United States can stay vacant for so long:

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So if COVID isn’t to blame for all the shuttered stores, what is? Well, when a landlord doesn’t lower the rent to get a new retail tenant, it’s because that landlord can’t. The market that sets retail rents isn’t only between tenants and landlords. It’s also between landlords and the banks that finance the buildings. And the banks, in many cases, won’t let property owners lower their rents enough to fill their properties. The pandemic may have emptied out America’s storefronts, but it’s banks that are keeping them that way…

So if you’re trying to lower the rent on your retail space, your bank may say no. And even if it says yes, it might demand you pay off a chunk of the mortgage up front, to account for the way you’re lowering the building’s value by lowering its rental income. In short, reducing the rent on your storefront might land you a tenant — but it could cost you big-time with your bank.

Of course, nothing is forcing banks to be all hard-assed about it. They’re free to renegotiate or refinance the terms of mortgages, given the extraordinary downturn facing retail storefronts. In some cases, according to real-estate brokers I spoke with, banks have apparently decided not to stand in the way of landlords in San Francisco who are offering shorter-term leases and lowering retail rents anywhere from 20% to 50%. One popular restaurant space in the city’s tech-heavy South of Market neighborhood that has been dark since 2020 is finally set to reopen this year as a bar and “entertainment concept” — but only because the landlord is offering the new tenant a below-market rate and improvements to the space…

You’d think everyone involved would be motivated to fill an empty storefront — landlords aren’t making money, cities aren’t getting taxes, and the neighborhood has an eyesore. But that eyesore may actually still be profitable to the landlord and the banks. “In SoHo, something vacant isn’t necessarily vacant,” says Ortiz. “Someone’s paying rent there, and the landlord’s perfectly fine with it. It’s a vacancy to the pedestrian, but not to the landlord.”

Vacant properties can create all sorts of problems for communities. The focus on this story is on city properties but vacant properties are issues in suburbs as well. As the story suggests at the end, encouraging properties to be vacant for shorter periods of time and/or for banks to be more flexible might require some creativity.

I wonder if there is more third party actors – not the lender or the current lease holder – could do to provide solutions. Are there certain land uses that could be more temporary but fill vacant spaces? Are there agreements to be made between lenders and a tenant to make something of the property without t being a fully functioning property?

Could communities also more directly pressure lenders about vacant properties? Perhaps this happens more behind the scenes but imagine a community group organizes around asking a specific lender about a particular property in the neighborhood. They make some noise, make the lender public, ask for changes.

How empty are American offices right now?

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A headline of an analysis of office space and vacancies in the United States suggests “American offices are half-empty.” Is this true? Here is how the analysis starts:

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From Dallas and Minneapolis to New York and Los Angeles, offices sit vacant or underused, showing the staying power of the work-from-home era. But cleardesks and quiet break rooms aren’t just a headache for bosses eager to gather teams in person.

Investors and regulators, on high alert for signs of trouble in the financial system following recent bank failures, are now homing in on the downturn in the $20 trillion US commercial real estate market.

After detailing the economic effects of this, particularly how banks might be affected, here is some evidence for the headline:

Office properties have been getting hammered the hardest. Hybrid work remains popular, affecting the rents many building owners can charge. Average occupancy of offices in the United States is still less than half March 2020 levels, according to data from security provider Kastle.

And then it is back to the possible fallout, including:

Trouble may build as the economy slows. Hill thinks US commercial property valuations could fall roughly 20% to 25% this year. For offices, declines could be even steeper, topping 30%.

The headline suggests half of offices are empty. The primary piece of evidence in the article says that average office occupancy “is still less than half March 2020 levels.” Does that mean average office occupancy was 100% in March 2020? Does this mean half of office buildings have no people in them? Even if the real figure about empty offices is 30% or 40%, this would be a big number with lots of ramifications.

An earlier article on the same site had a similar headline and evidence. From early March 2023, the headline: “Offices are more than 50% filled for the first time since the pandemic started.” The evidence:

Office occupancy across 10 major US cities crossed 50.4% of pre-pandemic levels for the first time since early 2020, according to security swipe tracker Kastle Systems. That marks the first time occupancy has crossed the 50% mark since March 2020, when many offices sent workers home because of Covid.

Again, the comparison is pre-COVID levels, not necessarily 50% of total possible occupancy. Again, this is a significant change that is a little different than claiming offices are more than 50% filled.

This all might be pedantic, but, if we should pay attention to offices, working from home, and the consequences of changes to commercial real estate, what are the actual figures regarding how much office space is occupied and/or leased?

Choices: lose out to Walmart and Amazon or adopt partnerships with tech companies to stay alive

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The many corner stores around the world may be facing a choice about how to survive in the coming years:

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One risk is that the infusion of tech money winds up making these independent businesses look and feel a lot more like chains. “The more you become digital, the more connected you are to the internet,” Lehr said. “The more connected you are to global trends, the more pressure you feel to do certain things.” The Indian start-up Jumbotail allows shopkeepers the opportunity to open one of the company’s branded J24 convenience stores, and S. Karthik Venkateswaran, Jumbotail’s co-founder and CEO, told me he envisions a world where consumers pass four different J24 stores throughout the course of their day. “Ubiquity is extremely important to us,” he said, but added that owners can still customize many aspects of their operations. “Every single store is different.”

But the other possibility is that by partnering with tech companies, these mom-and-pop shops might avoid the fate of getting squashed by giants like Walmart and Amazon, which can afford to sell the same goods at lower prices. To a certain degree, that’s already happened in the U.S., where Americans have been lured away from small businesses by the conveniences of Amazon Prime. “We would love to have Morocco and developing countries have a different fate,” Belkhayat said.

In the global South, millions of these beloved stores could one day end up part of a new digital economy that looks distinctly different from that of the West. Instead of transitioning to big-box retailers, communities will continue relying on the same shops they have for generations, but they’ll have evolved into futuristic outposts that double as tiny warehouses, banks, and grocery-delivery hubs. At least for now, the global tech industry has landed on the oldest trick in the book: If you can’t beat ’em, join ’em.

This choice – either partner with the big retailers or with the tech, finance, and other industries – is an interesting one. It certainly speaks to globalization in multiple ways. In terms of goods, these corner stores sell numerous important items and can provide key hubs for goods or services within a community. As those on the global scene look for ways to invest and make money, the corner store might be a goldmine. And the reach of products and finance and tech around the globe speaks to the numerous connections between people, organizations, businesses, and more. Then, each individual store might have the opportunity to stand out within its particular setting and because of the proprietor even as it slots into a global system.

I would also be interested to hear more about corner stores as local community institutions. In a private society like the United States, there are limited public spaces and shops are not always local or inviting. While a store involves private business transactions, it may also be a regular place for people to interact or utilize important services. If it provides local banking functions, this might involve might private individuals and communal activity.

How a bank could still make money offering negative interest rate mortgages

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A bank in Denmark explains how they can make money by offering mortgages with interest rates below zero:

Jyske Bank has had to do a lot of clarifying; there’s a widespread misconception that the bank is actually paying borrowers to take their money. First of all, the bank is not actually paying anyone; it is simply forgiving part of the loan each time a payment is made. A mortgage borrower is likely to end up paying Jyske back a little more than they borrowed, factoring in fees and charges associated with arranging the mortgage loan.

And the bank can afford to do this without losing money because it borrows at negative interest rates as well…

Despite being in “historic remortgaging,” Høegh said the negative interest rates don’t actually make it any easier for home buyers to get a loan, but makes it easier to get a bigger loan – a lower rate means a higher disposable budget.

As long as the borrower is paying more in interest than the mortgage cost the bank, there is money to be made.

I might be showing my ignorance here but it leads to a few more questions:

1. Does this change how much volume in mortgages banks and lenders need to make in order to make money?

2. Would an extended period of such mortgages lead to inflated housing values because people can pay more for homes?

3. These changes might not be so bad in a fairly stable housing market but I wonder if there would be more issues in a high-demand or high-price market.

It looks like we would have a ways to go before negative rate mortgages come to the US but it would be interesting to see what happens if they do come.

Home value algorithms show consumers data with outliers, mortgage companies take the outliers out

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A homeowner can look online to get an estimate of the value of their home but that number may not match what a lender computes:

Different AVMs are designed to deliver different types of valuations. And therein lies confusion.

Consumers don’t realize that there’s an AVM for nearly any purpose, which explains why different algorithms serve up different results, said Ann Regan, an executive product manager with real estate analytic firm CoreLogic. “The scores presented to consumers are not the same version that is being used by lenders to make decisions,” she said. “The consumer-facing AVMs are designed for consumer marketing purposes.”

For instance, more accurate models used by lenders do not include outliers — properties that sold for extremely high or low prices and that consequently would skew the averages and the comparable sales for a particular house, like yours. But models used by consumer websites, such as brokers’ sites and national listing sites, scoop in as much “sold” data as possible when concocting a valuation, because then they can claim to include all available data. That’s true, said Regan, but it’s more accurate to weed out misleading data.

AVMs used by lenders send along “confidence scores” that indicate how firm the estimate is. That is a factor typically not included alongside consumer AVMs, she added.

This is an interesting trade-off. The assumption is the consumer wants to see that all the data is accounted for, which makes it seem that the estimate is more worthwhile. More data = more accuracy. On the other hand, those that work with data know that measures of central tendency and variability can be thrown off by unusual cases, often known as outliers. If the value of a home is too high or too low, and there are many reasons why this could be the case, the rest of the data can be thrown off. If there are significant outliers, more data does not equal more accuracy.

Since this knowledge is out there (at least printed in a major newspaper), does this mean consumers will be informed of these algorithm features when they look at websites like Zillow? I imagine it could be tricky to easily explain how removing some of the housing comparison data is actually a good thing but if the long-term goal is better numeracy for the public, this could be a good addition to such websites.

Americans love It’s A Wonderful Life but did not heed its main lessons, Part One

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Americans like the movie It’s A Wonderful Life (see its ranking according to the American Film Institute). Yet, I am not sure that those same viewers and reviewers have taken the morals of the film to heart. Specifically, I will discuss two key themes and how American society has trended away from the lessons of the story.

The main villain, Mr. Potter, runs a heartless bank. In contrast, George Bailey continues in the family business and operates the local savings & loan. George wants to help local residents get into a new single-family home (which look like they are part of a new suburban subdivision). George ends up being the hero as he is a compassionate local businessman while Mr. Potter is cruel.

But, hasn’t the large, impersonal, profit-driven bank won out in American society, particularly as it comes to providing funding for single-family homes? Even as the film was made (in 1947), significant changes in the mortgage industry were already underway to help provide more long-term mortgages and government support for private mortgages. As the decades passed, more and more local banks were bought by national and international banks. The savings and loans organizations disappeared, particularly toward the end of the 20th century. The housing bubble of the late 2000s largely involved huge financial institutions who had invested in mortgages. The situation is a far cry from the era depicted in the film.

The megabanks of today may be more impersonal than cruel but the idea is the same: they do not have as much interest in local communities as George Bailey and his family. George’s institution needs to make money and he seems to be doing okay with a home and job. but it also feels a responsibility toward local residents. Even if Americans say they like the idea of small businesses and local businesses that part of communities, haven’t they given over control or assented to a financial system dominated by large firms?

Determining who is super-rich, private banking edition

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Categorizing people into different income groups is an interesting exercise for social scientists but it may be necessary for certain occupations. Take private bankers as an example:

Call it economy-class rich. Business class? That’s $100 million. First class? $200 million. Private-jet rich? Try $1 billion…

The measure of what makes someone rich has changed dramatically in the past two decades. In 1994, when Peter Charrington, global head of Citi Private Bank, first joined the firm, “Three million was largely considered ultra-high net worth across the industry,” he recalled. “Fast-forward almost 25 years, and $25 million is how we define ultra-high net worth.”…

Placing investable assets of at least $25 million with a wealth manager—and clients with that amount or more tend to work with a few firms—can bring access to initial public offerings, and having at least $5 million in investments moves a client past one regulatory hurdle to taking part in private offerings…

It’s direct investment in companies and buildings where the line between the rich and seriously wealthy is most pronounced. “This is a threshold differentiator among the world’s wealthiest, compared to the merely very wealthy, let alone the 401(k) investor,” said J.P. Morgan Private Bank’s Duffy. “These very large families are investing in private companies, owning a percent of the company versus a share of a public entity.”

On one hand, $25 million is pushed as a rough cut-off line but, on the other hand, there are some fine gradations both above and below this level. Does the quest to differentiate oneself in terms of resources as well as to offer different levels of service to such people ever end? (Presumably it must stop with the wealthiest people in the world but then there may be a quest to keep pushing those number upward.)

Another piece of this that is worthwhile to consider is the true sign of wealth is to buy into capital or the “means and modes of production.” It is one thing to own objects or investments and it is another to own significant stakes in companies and buildings. For example, the growth machine model of urban development would involve these super-rich individuals who the clout and resources to influence and direct development.

Miami in front of the Supreme Court arguing for damages due to subprime loans

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The Supreme Court just heard a case presented by the city of Miami that they should receive monies from banks because of the subprime loan crisis:

The story begins, Rugh said, in the late 1990s, when banks began marketing high-risk, high-fee home loans to black and Latino borrowers, especially those living in segregated neighborhoods. In a study published in 2015, Rugh and his co-authors examined 3,027 home loans in Baltimore (one of the few cities that has successfully settled a Fair Housing Act lawsuit against a bank) made between 2000 and 2008.When they controlled for basic loan characteristics such as credit score, down payment, and income, they found that black borrowers were channeled into higher-risk, higher-fee loans than were white borrowers with similar credit histories. These findings were compounded for black borrowers living in predominantly black neighborhoods: The study found that relative to comparable white borrowers, the average black borrower in Baltimore paid an estimated $1,739 in excess mortgage payments from the time the loan was made, a figure that was even higher for black borrowers in black neighborhoods…

In an amicus brief filed in support of Miami, a group of housing scholars argued that there is a direct link between the harm to borrowers documented by people such as Rugh and financial losses incurred by cities. Citing more than a decade of economic and sociological research from a variety of sources, Justin Steil, a professor of law and urban planning at MIT and one of the authors of the brief, explained, “the data is well established that foreclosures do lead to decreases in neighboring property values, which then lead to decreases in city revenues. Foreclosures,” he added, “also lead to more expenditures by the city in re-securing those properties, dealing with the vandalism, squatting, fires. And if the neighborhoods don’t recover, it just remains an ongoing problem for those communities to deal with.”

Supporters of the banks in this case say that if anything, leaders of cities like Miami encouraged the influx of credit into their municipalities. “I really think Miami wants to have this both ways,” said Mark Calabria, director of financial regulation studies at the Cato Institute. “If the banks weren’t doing business in Miami, they’d have a problem with that. It’s hard for me to believe that Miami would have been better off if Bank of America and Wells Fargo hadn’t been there.”

There are a lot of interesting aspects of this case, including the question of whether cities were harmed by loans made to individuals. But, there is little question in the sociological and additional social sciences literature: minority borrowers were steered toward loans with worse terms. (And other research suggests these worse terms for minorities extends to other areas including car loans and rental housing.)

Let’s say the court case goes in Miami’s favor and they receive some money. Two questions: (1) what do they do with this money? (2) What responsibility does the city have for not combating these loans in the first place and what are they responsible forward regarding disadvantaged neighborhoods? I hope one of the outcomes of this effort is not that cities can punt on their own policies and solely blame banks.