The Value of Underwater Commercial Real-Estate Loans

In the world of banking, what may seem like a burden to some could be seen as an opportunity by others. This is especially true when it comes to the piles of underwater commercial real-estate loans that have accumulated at small and medium-size banks.

The recent regional banking crisis has shed light on the issue, starting with the shocking collapse of Silicon Valley Bank and Signature Bank in March, followed by First Republic's takeover by JPMorgan Chase in May. It's clear that regulators have been criticized for failing to notice the "red flags" or take action on the growing risks faced by these lenders, despite the Federal Reserve's efforts to increase interest rates.

Pat Jackson, founder and chief investment officer at Sabal Investment Holdings in Irvine, Calif., believes that community and regional banks burdened with underwater commercial real-estate loans must proactively address their problems before they worsen.

Sabal Investment Holdings has positioned itself as a solution for these distressed banks, with the ability to purchase bulk loan pools from them. In fact, they are one of the largest buyers of assets seized by the Federal Deposit Insurance Company over the past decade.

Jackson emphasizes the importance of involving a third-party capital source in bank boards' decision-making processes, whether it's to raise capital or find a merger candidate. He confidently states, "We can take the assets off your books that you don't want. We are those guys."

While loan portfolio sales have been happening discreetly outside of FDIC takeovers, there has been an increase in regulatory scrutiny since the collapse of Silicon Valley Bank. Banks are starting to feel the pressure and are motivated to avoid being called out again.

Overall, distressed banks burdened with underwater commercial real-estate loans have an opportunity to turn their challenges into a solution. They just need to be proactive and seek out the help of experienced third-party capital sources like Sabal Investment Holdings.

Related: FDIC approves proposed capital requirements for U.S. banks

The Capital Requirements Debate: JPMorgan CEO Voices Concerns

JPMorgan Chase & Co.'s CEO, Jamie Dimon, recently expressed criticism about proposed stricter capital requirements for banks during a CNBC interview. Additionally, Dimon labeled the U.S. credit-rating downgrade to below AAA as "ridiculous."

Tighter Lending Standards and Rising Delinquencies

The latest July Senior Loan Officer Opinion Survey conducted by the Federal Reserve revealed that lending standards have become more stringent across the board since 2022. This development can be attributed to recent bank failures, recession fears, and the central bank's record-high short-term rate in over two decades.

According to a midweek client note from Barclay's credit team, tightening standards often precede an increase in delinquency rates. It is expected that delinquencies in commercial mortgage-backed securities (CMBS) and commercial real estate (CRE) loans will continue to rise, raising concerns within the industry.

The Impending Wall of Commercial Real Estate Loans

A significant concern looms over the $1 trillion worth of commercial real estate loans set to mature by the end of 2024. The potential implications of this event have experts worried about the impact on the market and the economy.

Fed Chairman Powell's Stance on Interest Rates

Fed Chairman Jerome Powell has been vocal about the need to maintain high interest rates for some time in order to combat rising inflation. To meet the central bank's 2% annual inflation target, Powell believes that sustained higher rates are necessary.

Seizing Opportunities in Distressed Commercial Real Estate

During the wake of the COVID-19 pandemic, investment firm Sabal took advantage of distressed commercial real estate loans, acquiring approximately $6 billion to $8 billion of such assets between 2009 and 2015. Many of these loans were purchased at steep discounts, allowing Sabal to capitalize on favorable market conditions.

Don't Hesitate: Act Now in the Face of Uncertainty

In these uncertain times, it is crucial not to wait for improvement in the market and economic conditions. According to industry expert Jackson, who established an opportunity fund during the pandemic, seizing opportunities in distressed commercial real estate is a wise move. Jackson continues to raise funds to invest in this sector.