Good morning. With a wave of bad loans expected, lenders of all types are preparing for the impact. Brookfield's REIT has a new CEO following a sluggish year, while the average monthly mortgage payment for Americans is 37% higher than the average rent.

Lenders Are Preparing For Oncoming Wave of Bad Loans

Lenders are anticipating a surge of bad loans that will clog their portfolios. If this comes to pass, it would make it far more difficult to provide financing at a time when borrowers are already having trouble securing it in the first place.

Bracing for impact: Banks and commercial mortgage REITs don’t like what they see in the tea leaves. To responsibly manage risk, Blackstone (BX) has increased its future bad loans estimate from $125M in 2021 to $326M last year. Mortgage Trust CEO Katie Keenan claims that uncollectible debt is likely to come from the REIT’s office loans, particularly.

Quick history lesson: To prevent another Great Recession, the Fed requires lenders to maintain bad-loan reserves (AKA current expected credit losses). Back in the day, banks only needed historical data to estimate the safety net they’d need to handle future losses. That practice failed spectacularly in 2008, as it left them unprepared to deal with an influx of bad debt on the books. The new bad-loan reserves rule also extended requirements to non-bank lenders.

Not fast enough: Across the banking sector, bad-loan reserves are back near pandemic levels, when expected losses peaked at $245B in late 2020. That number came down in 2021, as banks prepared for interest rate hikes. At the end of last year, expected losses were pegged at $195B. The rate at which lenders increase reserves this year depends on whether they’ve been caught off guard. For example, TPG Real Estate Finance upped reserves from $46M in 2021 to $215M last year.

➥ THE TAKEAWAY

Risk management: New accounting standards could make it more difficult to write new loans. Credit loss reserves will also lower the amount of capital that a lender has on the books. That means banks will have far less leeway with lending. And in the wake of SVB, Signature Bank, and Credit Suisse’s failures, real estate lending anxiety is through the roof, so borrowers are bound to have a tougher time.

Brookfield REIT Announces Changing of The Guard

Brookfield (BN) has announced that Brian Kingston will take over leadership of its nontraded REIT from current head Zachary Vaughan. The fund and larger counterparts have been grappling with slower fundraising, along with falling property values and high investor redemptions.

Out with the old: On Tuesday, Brookfield Real Estate Income Trust declared that Brian Kingston, who is presently the CEO of Brookfield's real estate business, will assume the role of leading the REIT in addition to his current position. Zachary Vaughan, who is leaving to explore other business opportunities, will assist with the transition, according to Brookfield.

Late bloomer: When it came to nontraded REITs, Brookfield was slow to enter the market, with Blackstone and Starwood launching their own in 2016 and 2017 respectively, and outpacing their early rivals in fundraising. By the time Brookfield entered the market, the nontraded REIT segment was raising around $35B annually. Brookfield's trust reported a net income of $5M in 2021, but in 2022, headwinds caused them to suffer net losses of $39M.

NAVigation: Brookfield REIT’s NAV began ticking down in Q4, dropping 2.4% in November and 2% in December. This led to consecutive months of negative returns for shareholders, although the drop in nontraded REIT values was lower than shares in their publicly traded alternative. By the end of 2022, Brookfield REIT’s portfolio—made up of 56% multifamily, 26% net lease assets, 7% single-family rentals, 6% office, and 5% logistics—totaled $1.58B.

➥ THE TAKEAWAY

The bigger picture: Brookfield REIT began 2022 with a relatively strong performance, but its monthly totals gradually declined in the second half of the year, coinciding with an increase in redemption requests that peaked at $31M in Q4. These trends were not specific to Brookfield, as Starwood and Blackstone also experienced similar issues and were forced to restrict withdrawals, even as investors continue to request billions in redemptions.

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Mortgage Payments Higher Than Monthly Rents Nationwide

A new report from CBRE Research alleges that the typical US homebuyer faces an average monthly mortgage payment 37% higher than the average monthly apartment rent.

Uphill battle for homeownership: In the past, monthly mortgage payments for newly bought homes were close to monthly apartment rents. That’s changed in recent years with rocketing mortgage rates and sky-high asking prices. Since 2019, average monthly mortgage payments have jumped 70%. And even though home prices have fallen 9.7% since Q2 2022, it hasn’t balanced out higher mortgage rates. For that to happen, prices would have to fall another 24% this year alone.

The grass is always greener elsewhere: Home valuation premiums vary from market to market, but in nearly every major U.S. metro, monthly mortgage payments are significantly higher than rents. For instance, New York and San Francisco premiums shot up because of higher home prices and slower multifamily rent growth. Meanwhile, Miami and Kansas City have seen increases in rent and home prices as migration from higher-cost-of-living metros continues apace. Currently, San Jose, Austin, Seattle, Kansas City, and Salt Lake City have the highest ownership premiums in the nation.

Hungry for homes: The low supply of homes is also a hurdle for potential homebuyers. But it’s no surprise why nobody wants to sell—they’re holding onto those pandemic fixed rates for dear life. More than half of active mortgages originated during the pandemic, and many are refis. In fact, almost 97% of active mortgages have interest rates below current levels. Unsurprisingly, there are 34% fewer active listings now than in Q4 2019, and with mortgage rates at 6.42% in March, most Americans aren’t willing to take the plunge.

➥ THE TAKEAWAY

This, too, shall pass: CBRE anticipates that any negative impact on market fundamentals will remain temporary. The housing shortage and higher rates have kept the demand for rentals strong. Ultimately, lower mortgage rates will have the largest impact on monthly payments as inflation decreases and the Fed eventually lowers interest rates.

📖 Read this report from Newsweek detailing Morgan Stanley’s prediction that a crash worse than 2008 is on the horizon for commercial real estate.

🖥️ Watch this segment from CNBC illustrating the struggle between buyers and sellers over prices that are causing Manhattan real estate sales to drop like a stone.

🎧 Listen to the latest GreyCast podcast episode where Don Peebles, executive VP of Peebles Corporation and real estate entrepreneur, shares how his father's teachings influenced his career and what to expect in the post-pandemic future.

• $80 billion windfall: The IRS has issued a strategic operating plan outlining the allocation of $80 billion in additional funding for the next ten years, including details of what is and isn't covered.

• Racing to zero: Billionaire Tom Steyer will be purchasing and upgrading properties with the intention of cutting his portfolio’s greenhouse gas emissions to net zero without using offsets. The investment will focus on the Pacific NW, CO, CA, AZ, and TX.

• Exit stage left: Prices for commercial mortgage-backed bonds recently dropped to early pandemic levels, led by growing office vacancies and high interest rates. As a result, investors have fled from CMBS in droves.

• Making the leap: DoubleLine Capital LP launched two new ETFs, the DoubleLine Commercial Real Estate ETF (DCMB), and Doubleline Mortgage ETF (DMBS). Their timing is tricky, however, since the CRE market is currently distressed.

• Choice words: Joe Chetrit has made public comments accusing debt firm Maverick Real Estate. In January, they foreclosed on one of Chetrit’s developments. Chetrit claims they kept other bidders at bay so Maverick could secure a deep discount.

• Holding the bag: The FDIC continues to waffle over what to do with the $91B portfolio acquired from SVB and Signature Bank. For now, investors are staying away from mortgage-backed securities due to regulatory uncertainty.

• Tempering expectations: According to ANAX, CRE doom-and-gloom claims are just an exaggeration of a primarily regional crisis, and multifamily is still on the path to recovery.

• Looking at logistics: Walmart (WMT) has announced plans to invest more in its supply chain. Unlike Amazon’s (AMZN) bloated network, Walmart has several advantages that make their investment far less risky, too.

• Beating the house: Development will continue on Related Group’s three-tower project after the Miami Historic & Environmental Preservation Board voted to withdraw a proposed designation of 77 Southeast Fifth Street as a historic site.

• Pay up! The Hawaii state legislature is considering a bill that would require tourists to pay a fee upon visiting state parks or trails as tourism contributes to major environmental damage on the islands.

• Yellow Brick Road: 5 years after the establishment of the Opportunity Zone (OZ) program, $34B has been invested. The problem? Not much public data is available, and the true impact of the initiative remains unclear.

• Due diligence: Prospective US office tenants are scrutinizing potential landlords more than ever, careful to ask who their lenders are. Tenants worry that operators crushed by debt may not be capable of carrying out their duties.

• King of the skies: Atlanta Intl. has been crowned the busiest airport in the world once more after seeing 93.7M passengers in 2022 (up 24% YoY). The number of global travelers last year neared 7B (up 54% YoY).

• Grow your wealth: If you crave "stable diversification" and struggle to find deals outside your backyard, consider taking the proactive step of investing in necessity-based CRE offerings with First National Realty Partners.

Nearly $7T in uninsured deposits are sitting in American banks. This chart shows you where the bones are (or were) buried.