Commercial property markets aren’t closed

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Well here are a couple of fun charts:

Of course, the fun is if you’re a lender in US commercial real-estate markets, not if you’re a borrower.

That figure on the left is a gauge of secured debt costs for CRE borrowers, which have climbed to their highest level in 20 years. (To specify, it’s the weighted average coupons of newly issued bonds backed by commercial mortgages.)

Even lower-investment-grade tranches of CMBS are carrying unusually high interest rates. Spreads over risk-free benchmark yields for BBB- tranches — the lowest tier of IG — are significantly higher than spreads on the entire high-yield corporate bond market, as the preceding chart on the right shows.

But Goldman Sachs’ strategists argue that it could be worse, based on some recent quarterly reports from banks:

Some banks were more constructive on the multifamily sector and others expressed optimism for class A office properties outside of urban centres. Likely reflecting these positive surprises, the performance of CRE-exposed equities has been quite strong over the past two months.

Overall, the signal leaves us comfortable with our view that, while bank lending standards for office properties are likely to remain tight until the sector’s valuations fully adjust . . . the risk of systemic shock remains quite low considering stable capital positions and still-healthy fundamentals in other parts of the CRE complex.

But comparing all financial risks against the threat of “systemic shock” is a bit reductive, isn’t it?

There’s plenty of pain that can be experienced by office-property owners, regional banks, and other types of lenders and borrowers without an outright crisis among the global systemically important banks. Regulators have been focused for more than a decade on preventing that type of crisis, after all.

So when the bank’s strategists cite solid loan performance at Bank of America and JPMorgan as a reason for confidence in CRE markets, that seems kind of . . . odd. Only one of the names in the chart below (PNC Financial) could be considered anything close to a regional bank, and even that one is so large that it almost deserves its own separate category.

Goldman Sachs also acknowledges that lending standards have tightened. The strategists try to take an optimistic view, and point out the biggest contraction in credit has been in construction loans. But other markets’ standards seem to have tightened almost in lockstep, if not exactly as much.

If anything, it may be more worrying to see that multifamily credit (apartment buildings, basically) has tightened almost as much as non-multifamily credit, since the latter category includes offices as well.