The markets have priced in a soft landing, and most people were beginning to believe it was possible. Then New York Community Bancorp threw cold water on the party after they reported large losses due to failing CRE loans. At the same time, the FED removed from its statements that, “It was certain the banking system was sound.” Piling onto this negative news was a report from Aozora, a Japanese bank, that said it was building loss reserves due to failing US commercial real estate loans and will now lose money for the year. And the bad news is spreading to Europe, where Julius Baer in Switzerland reported $700M in bad CRE loans.
At the same time the market is celebrating strong job reports, they are de-emphasizing the mounting layoffs. ADP reported 107K new private employer jobs in January, which was offset by over 100K new announced layoffs, and the layoffs are accelerating. Hasbro is laying off 20% of its workforce, Levi’s 15%, Spotify 17%, Xerox 15%, PayPal 9%, Schwab 6%, Citigroup 20K workers, UPS 12K workers and on and on.
“The office market has as existential crisis right now”
Barry Sternlicht — CEO Starwood Capital
Barry Sternlicht estimates that in the office sector, someone somewhere has lost $1.2T over the past two years, but no one is sure where those losses are. We believe the regional banks like New York Community are the ones holding many of these bad loans, and if interest rates remain elevated, many of these loans will fail. We believe with mounting federal deficits, corporate layoffs and bank failures, the FED will be forced to reduce rates, which will be a boon for multi-family investments.
We expect distressed opportunities like our new asset in San Antonio will continue to grow as time works against compromised owners hanging on by a thread. We will continue to evaluate deals and make offers at attractive prices for our investors.
