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There's a funny phrase going around in many banking and commercial real estate circles these days. Extend and pretend.
You pretend that the value of the building is the same, and you extend the loane right so you don't recognize the loss on the bank's balance sheet.
That's Bloomberg real Estate reporter Patrick Clark, And as he said, extend and pretend is exactly what it sounds like. A bank extends alone to a borrower and pretends that the value of the building has stayed the same. Except in today's economy, nothing has stayed the same. The exodus of office workers from Downtown's after the COVID nineteen pandemic, and then the rapid rise in interest rates flipped a lot
of long held commercial investment norms on their head. Natalie Wong covers commercial real estate at Bloomberg.
For a long time, you have investors and lenders pouring money into offices, specifically US offices, because that was seen as like a safe alternative to bond.
She says those investments were backed by high quality buildings at a time when no one would have guessed that companies wouldn't have a need for workers in the office, So.
As long as you had companies growing, you would have these basically long term investments that were backed by stable, rising rents.
But now with many of these loans nearing maturity, commercial property deals in the US are picking back up at deep discounts and forcing lenders to face just how far real estate prices have fallen. Today. On the show, we discussed the widespread concern that these losses will ripple across the global financial system and what it means for US cities. This is the big take from Bloomberg News. I'm Sarah Holder.
We're final at a point where, you know, there's indication from central banks around the world that even if rates don't come down at least there'll be stable for the foreseeable future, which is allowing people to make more calculations.
But at the same time, it's also.
Starting to initiate more deals for starting to see deals picking up, Like, for example, you know, there's an office building on seventeen forty Broadway. It's an office building in Manhattan. Blackstone, a very reputable big asset manager, bought the building just a couple of years ago, spent quite a bit of money renovating the building, making it sort of an office building that people talk about today with amenities. It's going to attract people, that's going to attract people back to work.
And they walked away from that building two years ago. They just decided to cut their loss because it wasn't worth it to put in. They say, good money after the bad. And now the debt that's behind that building is being marketed at a fifty percent discount. So you're seeing these massive discounts on these dominant buildings start to
show up in the market. And it's a lot harder for whether it's the investor or the lender to tell the regulator is that the value of a lot of their buildings haven't fallen greatly.
And so I think this is starting to create.
More pressure, you know a little bit of panic too from parts of you know, the lenders that hold these loans, maybe even the owners of these buildings to finally start to realize and admit just how far values have fallen. And in some cases, you know, it could be that the building that they owned is only at dirt value.
So Patrick, what these transactions are telling the market and investors and developers is the true value of these buildings, and that's indicating to them that we can't just extend and pretend anymore.
You know, when everyone is pretending, then we can all pretend. Nobody knows no office buildings have sold this year. How can you possibly say that my building is worth fifty percent of what it used to be what I paid for it. But now you've got these high profile examples, and it gets harder.
And I think one of the reasons that you could look at is like, if you argue that interest rates might come down, if they did rapidly, there's a way they can just sort of skate through this and maybe the values will come back up, because it's very much
intertwined to the borrowing costs. But I think people are starting to recognize that, at least in the near term future, interest rates may not go up, but they will stay the same, and therefore they have to start underwriting the costs of their property, the cost of their investments at that level.
So, Patrick, what is the scale of the problem here? How many millions of dollars of property holdings are we talking about being at risk?
We said twenty trillion dollars worth of commercial property in the US. That's the best number available, but at any rate, it's a bigger number than I can get my head around. There's more than a trillion dollars worth of commercial real estate loans reaching maturity point in twenty twenty four, in twenty twenty five. Again, what is a trillion dollars? It's a lot. And the problem is that the buildings are no longer worth as much as they were. That's the
heart of the problem. And again for the buildings that are performing well, it's less of a problem, but it's still an issue. The building is likely worthless, so the bank's collateral is not as good. It can't extend as much credit, and so it's harder to refinance the property. And then maybe it is a building that has these huge problems because people aren't showing up to work anymore. People are logging on from home. Now the collateral is
worth an even greater discount. And so that's where you get in this situation where you can't extend and pretend anymore. And the borrower is going to decide either Okay, I'm gonna go in my wallet and I'm gonna come up with some extra money, and I'm gonna make this right, or at that point the borrower can also just say bye bye, it's your building now, and then it's the lenders problem.
And Natalie, this isn't just a problem for the US, right, Is there risk here for financial institutions and lenders globally?
Yes, it's it's rippling out already. We're seeing across the global financial system. You know, with the New York Community Bank shock in January, when you know, their stock completely plunged because they were marking down much bigger reserves for losses tied to commercial real estate.
We st start to ripple out.
In Japan, the Azora Bank also took a big hit with losses mainly tied to US commercial real estate struggling US offices South Korea. Their asset managers and their lenders were very big on US commercial real estate and office loans over the past few years, and so they're expecting a wave of bad loans to come to But it's it's shocking because these are long term institutional investors either
supposed to make smart investments. They're not the ones taking the biggest risk, and they're already starting to see some of the impacts of having to mark down these lower values, and we're starting to see them some of them at least, you know, cut their losses on specific things, but they're exposed to the US real estate market.
After the break. What these loans coming do mean for the US banking industry and who might come out of this on top? So, I mean, if they can't get these loans off their books, what does that mean for the banking sector? How much trouble could these banks be in.
I think there's a general sense, even irrespective of commercial real estate, was that there might be too many banks
in the US. You know, there's like forty five hundred banks or you know, we're real estate reporters, not necessarily banking experts, but we certainly hear people say over the next couple of years, with commercial real estate debt as a catalyst, hundreds, if not thousands of banks are going to go away, either because the go out of business, or they need to be swallowed up, or they need
to join forces with another weak bank to survive. It's certainly one that our newsroom is really keyed in on to see how this plays out.
And so this is mostly a problem for these smaller and regional and mid size banks.
It's a bigger problem for them, you know. I mean, if you're JP Morgan and you you have all of these different businesses that generate revenue for you, and your commercial mortgages are a much smaller percentage of the assets on your balance sheet, and so if those assets wind up getting you know, turning out to be worth seventy cents on the dollar, you're still you know, I'm not saying that's the case there, but you can come back
from that. Whereas you know, if you're a regional bank in Tulsa and you know you've got a few bad office loans, like that could wind up being a really big deal for you.
I guess like there are winners and losers here right A. Who are the winners?
There's a lot of people out there that are flushed with cash. Some of the buildings that we talked about were in distress, you know, the owners that walked away from it. Like Blackstone just closed a record breaking property fund last year. They have more than thirty billion dollars in capital commitments and they're actively out there looking to invest that money in real estate. They were the buyers
of the largest chunk of that failed Signature Bank. Commercial real estate loans and they were the buyers behind that. So you have them walking away from this one off office building that they rode off two years ago on Broadway in New York City. But on the other hand, they're deploying billions of dollars into other real estate opportunities, right, So they're still bullish on a sector.
I think you can also take solace in the creative destruction aspect of it. Like, the reason why these office buildings are not worth as much is because they're functionally obsolete or largely obsolete, and we shouldn't try to hold on to that, right, commuting sixty minutes, ninety minutes whatever to go sit in a dreary office building, you know, with bad fluorescent lighting and you know, one of those sort of Warren of cubicle type things like why say that?
Who was that good for? So I think it's not all bad when things age out of usefulness, we have something else that's better now.
Well, Natalie Patrick, thank you so much for being here and sharing your reporting. Thank you, Thank you, thanks for listening to the Big Take from Bloomberg News. I'm Sarah Holder. This episode was produced by Alex Suguiera. It was edited by Caitlin Kenney and Kara Wetzel. It was fact checked by Stacy Renee. It was mixed by Alex Suguiera. Our senior producers are Naomi Shavin and Jill Diddy Carly. We get editorial direction from Elizabeth Ponso Nicole beemsterbor is our
executive producer. Sage Bauman is Bloomberg's head of podcasts. Thanks for listening. We'll be back next week.