There will be blood: Lenders warn of bank failures at TRD forum

“I don’t think most of the banks understand what is on their balance sheets”

Keith Larsen

May 12, 2024, 8:00 AM

If you were looking for positive signs about commercial real estate, you should have run far away from the Metropolitan Pavilion in Manhattan on Wednesday afternoon.

Benefit Street’s head of real estate Michael Comparato said that more pain is coming for banks with commercial real estate exposure during a live recording of The Real Deal’s podcast Deconstruct at the publication’s annual New York forum.

Possibly over 500 will collapse, others will be acquired, and the vast majority don’t have a clue about their problems, he said.

“I don’t think most of the banks understand what is on their balance sheets,” said Comparato. “They are basically being told what to do by federal regulators and that’s equally as terrifying.”

Other panelists, Seth Weissman of Urban Standard Capital and Steven Stuart of Fortress Investment Group, also expressed a bleak outlook for banks because of higher interest rates.

“I expect to see more bank failures,” said Stuart. “Once you have a run on the bank, the FDIC will step in to take it over.”

Even for the optimist, the debt markets are challenging to navigate. It’s tough for lenders to value properties, while owners are reluctant to chip in more money needed to recapitalize their deals.

“We are looking for some substantive equity commitment if they are looking for any kind of relief,” said Weissman.

Fortress recently launched a $548 million foreclosure on the Cohen Brothers Realty’s equity interests in a national real estate portfolio. When TRD asked Stuart about the foreclosure, he paused, then said he couldn’t comment because of pending litigation.

Comparato jumped in. “I’ll answer for him. Pay your debt service and it’s not a problem. Pay your loan off on maturity and it’s not a problem,” he said.

TRD asked if Stuart wanted to add anything to Comparato’s statement.

“I think he did a great job,” he quipped.

Comparato has emerged as a doomsday prognosticator for the office sector. He made that point clear on the panel.

“Office is bad. Office is really really bad. We see the trades. We see it happening and the market is kind of ignoring it.” Comparato. “We are just pretending like it’s not happening. It’s happening.”

According to him, any office lending today is not based on cash flow, but essentially guessing on the basis, or valuation.

“You are essentially saying it used to be worth $300 per foot, now it’s trading at $90 per foot, and I’m lending $40 per foot,” said Comparato. “If I’m wrong, that’s really painful.”

Weissman, for his part, said they recently provided a loan for a distressed buyer of an office building in Little Rock, Arkansas, at around $25-30 per foot. He said there are not a lot of lenders interested in the office, leading to costlier rates.

Comparato noted that there is no shortage of demand for other assets. His business is seeing interest in all lending products, construction, bridge and CMBS.

But for the poor office owners expecting the Federal Reserve to significantly lower rates anytime soon, restoring relief to property owners and salvaging deals: Comparato advised they should keep dreaming.

Stuart, meanwhile, said he didn’t think the market “would see any rate cuts in the near term.”

All the panelists agreed that any cuts that did come likely wouldn’t be deep enough to help borrowers on the brink of default.

“Just mathematically,” Comparato said, “50 basis points is not a panacea by any means.”