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It is Sea’s policy to respond to customers' claims promptly and fairly. Lending money to shopkeepers, landlords and hoteliers in places such as Times Square or Soho used to be considered almost a sure thing.
But that was before the contagion emptied New York City’s skyscrapers, hotels, apartment buildings and stores, leading the President of the United States to call it “a ghost town” and forcing some borrowers to stop making loan payments. If U.S. banks absorb big losses on their $2 trillion in commercialrealestate loans, the entire economy will suffer.
Just the fear of looming bankruptcies and defaults has prompted banks in recent months to restrict new lending, at a time when the virus-ravaged economy needs all the help it can get. Tighter credit standards make it harder for commercial borrowers to roll over old loans as they come due and could starve other businesses of capital needed to expand and hire more workers.
If the economic downturn proves lengthy, mounting losses could even undermine financial stability, according to some Federal Reserve officials, economists and credit analysts. “This is something that could make a bad situation worse,” said Adam Slater, lead economist for Oxford Economics in London.
Banks have repeatedly failed after stumbling into big losses on commercialrealestate loans, from the savings-and-loan crisis of the 1980s to the Great Recession in 2008. This time, the losses could be even worse, with the pandemic forcing a fundamental reconsideration of how Americans work, shop and live.
Such shifts would make downtown office buildings, hotels and stores less valuable, sending losses ripping through banks and bond investors that hold $3.4 trillion in commercialrealestate debt. Office space, the largest single slice of the commercialrealestate sector, already is seeing rents fall as vacancies rise.
“We remain confident in our underwriting and believe we are well positioned to navigate the current environment from a credit perspective,” Michael Shakedown, the bank’s chief financial officer, told investors last month. “In the event of another such crisis, most banks would be affected, and many might fail,” wrote economist Pablo D’Eras mo, the author.
In the second quarter, banks reported the largest percentage increase in charge-offs for bad loans since early 2010, according to the FDIC. In recent speeches, he has warned that commercial property values were artificially inflated by more than a decade of ultra-easy money.
But in past crises, losses were slow to materialize, not appearing until lengthy commercial leases came up for renewal. An aging shopping mall south of Minneapolis shows how the pandemic is hurting lenders and investors.
In July, CBL & Associates, a real estate investment trust, was due to pay off its $63 million mortgage on the Barnesville Center, anchored by tenants such as J.C. Penney and Macy’s. That 85 percent decline will mean losses for investors holding the riskiest slices of a securitized loan pool packaged by Goldman Sachs’s structured finance unit.
At Signature Bank, meanwhile, executives have extended forbearance to some borrowers, hoping they can resume making loan payments once the pandemic passes. Chief executive Joseph DePaul is betting that the bank’s deep-pocketed borrowers and base in neighborhood retail outlets will help it weather the storm.
Last month, it tapped the bond market for $375 million, paying a lower interest rate to raise fresh funds than JPMorgan paid on its last debt offering. Photo: Spencer Plant/Getty Images handful of trends in commercialrealestate leasing will dominate the new year, and are worth watching.
An increasing number of office tenants, in particular, are seeking leases that are shorter than in the past, and more landlords are responding in a bid to retain and attract tenants at a time when commercial buildings are sitting largely empty most workdays. Photo: Robyn Beck / AFP via Getty Images Creative retail and restaurant leases are a new normal.
Trends that existed before COVID-19, such as the titanic shift to e-commerce, have only accelerated ; and stay-at-home advisories and mandatory nonessential business closures have cost eateries and shops valuable sales time (and landlords lots in rent). The months-long new reality has led landlords and tenants to get more creative in terms of lease arrangements to stem the tide of vacancies and bankruptcies.
In April, as New York faced the darkest days of the coronavirus outbreak to date, the city’s biggest office landlord decided it needed a $1 billion cash cushion. SL Green Realty’s planned sale of the Daily News Building for $815 million had fallen through weeks prior, and the real estate investment trust sought to recapitalize other assets to shore up its balance sheet for the uncertain times ahead.
While the One Madison deal set a new record for South Korea in the 12-month period RCA analyzed, the second largest Korean acquisition since July 2019 was 195 Broadway, an office building in Lower Manhattan. In September 2019, a group of companies including Haney Financial Investment and KGB Life Insurance paid about $100 million for a majority stake in AT&T’s global headquarters in Dallas.
The Texas metropolis saw another big Korean deal in February as KB Asset Management paid about $370 million for the office and retail components of the Union, a 866,000-square-foot mixed-use complex completed in 2018. Meanwhile, Is and Tiger Alternative Investors went on a student housing buying spree in California, Michigan, Texas and Florida, investing more than $700 million alongside other U.S.-based partners, according to RCA.
Last September, Mira Asset Management emerged as the winning bidder for a $5.8 billion hotel portfolio owned by China’s embattled An bang Insurance Group. With historic levels of dry powder waiting to be deployed, investors around the world have been trying to figure out how to make deals work in the age of social distancing and quarantines.
“There’s a unique feature to this crisis in that, even for domestic investors, there have been new challenges associated with evaluating investment opportunities ,” said Sam Chandon, dean of NYU’s Shack Institute of RealEst ate. While some larger asset managers in South Korea will have boots on the ground in the U.S., the syndicated nature of most Korean deals adds another wrinkle to the process.
“There’s been a focus on getting creative and entrepreneurial about how to get something done,” said Maggie Coleman, a senior managing director in All’s real estate investment banking and global loan sales group. “The idea is that within a year, hopefully, they’ll be able to come in, and if they find something in their due diligence or there are legal issues, they have the right to sell back to the securities company,” said Won Lee, a partner at Mayer Brown’s New York office and co-head of the law firm’s U.S. Asia RealEst ate practice.
When investing in commercial properties in the States, foreign buyers will often seek to hedge their exposure to currency fluctuations by buying financial instruments that can offset the impact of adverse changes in exchange rates. This has been a major concern for Korean institutional investors, who are by and large required to hedge currency risk on their equity investments due to the country’s regulatory environment.
“The cost of hedging prior to COVID-19 stood at over 200 basis points,” said Alex Foray, head of Newark Knight Frank’s international capital markets division. The Korean buying binge in Europe began in London, with massive deals like the National Pension Service’s $1.5 billion acquisition of Goldman Sachs’ new headquarters in the British capital.
As Brexit worries grew and competition heated up, Korean firms moved to the continent in search of new opportunities, scooping up major properties in France, Belgium, Germany, Slovakia, Poland and elsewhere. Just as the European market appeared to be near saturation, the Federal Reserve began cutting its benchmark rate, opening up a range of investment opportunities that had been largely closed off for the past several years.
Since regulatory reforms loosened capital requirements for securities firms in South Korea in 2014, these companies have played a major role in facilitating overseas real estate investment. Even as prohibitive hedging costs had blocked Korean institutions from making equity plays in U.S. real estate, the country had emerged as a dominant source of foreign debt investment.
He added that investors from South Korea are most aggressive in this “core sector” with German funds, which had also faced hedging cost headwinds, coming in close behind. In the months since coronavirus began, Korean firms have acquired logistics facilities in Germany, Poland and Scotland and have been seeking similar opportunities in the U.S. as well.
“We sort of hit a reset button with COVID-19, and the economic cycle,” Foray said, adding that he expects to see “a prolonged run” of investment from South Korean and other Asian-Pacific countries as hedging costs remain low. The U.S. government’s recent moves against TikTok and WeChat haven’t helped, as Trump’s ongoing trade war raises new concerns for a wide range of Chinese companies seeking to do business in the States.