The Rabid Capitalist

Professor Glenn A. Okun

NYU Stern School of Business

August 8, 2023

There are more signs of growing trouble in credit.  The latest are in commercial banking and mortgage REITs.

Mounting pressure on the banks.

Last night, Moody’s downgraded their ratings on ten small and midsized banks and warned that some major banks are under review for a possible reduction in rating as well.  The worrisome statement from the rating agency:

“Asset risk is rising, in particular for small and mid-size banks with large CRE exposures.”.

Mortgage REITs restrict lending.

In the midst of one of the most unstable commercial real estate markets in recent memory, mortgage REITs are restraining their operations to safeguard their balance sheets. Because it is becoming more difficult for many borrowers to refinance due to increased interest rates, and because many properties, particularly office buildings, are experiencing higher vacancy rates, default rates are growing for all lenders.  According to the Mortgage Bankers Association, total commercial and multifamily mortgage lending is anticipated to reduce to $504 billion this year, a 38% decrease from 2022.

New loans have also been drastically reduced by other large lenders, such as local small and large banks, as well as commercial mortgage-backed securities issuers. Due to this, many owners of commercial properties are forced to contribute equity capital in order to refinance debt when it becomes due, which raises the possibility that more owners could go into default and possibly lose their properties.

The liquidity squeeze continues.

We are experiencing the early phase of constrained liquidity across the debt and equity risk capital markets (including commercial real estate lending, corporate credit, private equity and venture capital).  The cycle of business failure (or failure to maintain historic valuations upon which private capital was invested) causing capital providers to take write downs and write offs, leading to restricted investing due to diminished financial capacity or to derisk (improve the risk profile by raising the cash balance), driving further constriction in capital availability and additional failures due to lack of funding is underway.

We must expect a market wide recognition of this liquidity squeeze with equity and debt revaluation that reflects these risks.  The subsequent pain experienced by investors and the resulting growth in their risk aversion will create widespread, compelling opportunistic investments.   Stay tuned.