- Billionaire investor Howard Marks has sounded the alarm over the commercial real estate sector.
- The Oaktree Capital co-founder warned that mortgage defaults could add stress to the US financial system.
- “We’re very likely to see mortgage defaults in the headlines, and at a minimum it can scare off lenders,” Marks said.
Billionaire investor Howard Marks has sounded the alarm over commercial real estate in what he calls “one of the biggest worries” facing US banks today.
In a Monday notethe Oaktree Capital Management co-founder warned of a wave of mortgage defaults that could add stress to the US banking sector.
“We are very likely to see mortgage defaults in the headlines, and at a minimum it can scare off lenders, throw sand in the cogs of the financing and refinancing process, and further contribute to a heightened sense of risk. “, said Marks.
“Developments along these lines certainly have the potential to add to any further distress that materializes in the months to come,” he added.
THE commercial real estate market has become the latest concern for investors thanks to higher interest rates, tighter lending standards — part of the fallout from the turmoil that hit banks in March — and work-from-home trends. This is a problem for small and medium US banks that have a high exposure to commercial real estate.
High borrowing costs and tighter credit terms caused by bank jitters could create hurdles for large homeowners as they seek to refinance a stack of loans. Nearly $450 billion in commercial real estate debt is due to mature in 2023, meaning a final payment on those loans is due, according to data Trepp cited by JPMorgan.
“Higher interest rates call for higher asking cap rates (the ratio of a property’s net operating income to its price), which will cause most real estate prices to fall” , Marks said. “The possibility of a recession bodes ill for rental and occupancy rates, and therefore for landlord incomes,” he added.
Marks, however, stressed that he did not know if banks would suffer losses on their commercial real estate loans, or how much.
“Mortgage defaults do not usually signal the end of the story, but rather the start of negotiations between lenders and homeowners. In many cases, the outcome is likely to be an extension of the loan on restructured terms “, did he declare.