|
|
Friday, March 22, 2024
POLITICO Massachusetts Playbook: Mass.’ migrant mess spills into NH elections
Your Signature is Needed: This dangerous pesticide could put you and your family at risk
|
More Failed Banks and Office Building Demolitions Likely Before Real Estate Problems End, Warn Two Federal Agencies
SUBSCRIBE TO THIS NEWSLETTER TO RECEIVE TIMELY REPORTS
More Failed Banks and Office Building Demolitions Likely Before Real Estate Problems End, Warn Two Federal Agencies
By Pam Martens and Russ Martens: March 21, 2024 ~
Federal banking oversight agencies are in agreement: U.S. banks are facing a potential tsunami of problems with commercial real estate loans in the office space sector.
Last June 1, the Office of Financial Research (OFR), (the agency created under the Dodd-Frank financial reform legislation of 2010 to warn about financial stability risks), explained why the vacancy rate in office buildings is in dramatic contrast to the actual occupancy rate, and thus bodes poorly for the future demand for renewing office leases. OFR writes as follows:
“The health of the CRE [Commercial Real Estate] office sector is not only measured by the amount of space leased and rent paid today, but also by how much space will be required in the future. In addition to space available for sublease, we can estimate the amount of space currently occupied by employees by measuring card key swipes using the Kastle Back to Work Barometer.
“Unfortunately, future demand for office space appears weak. In addition to the growth of office space available for sublease, the amount of office space occupied by tenants remains stubbornly low…Although the current office vacancy rate is 16.4%, the average occupancy rate measured by the Kastle Back to Work Barometer is 49.8%. (Note that this represents a weekly average; daily occupancy varies). This implies a structural vacancy rate of 50.2%. Prior to the COVID-19 pandemic, office occupancy averaged close to 100%. This means that on average, firms are paying rent for twice as much space as their employees are currently using. If occupancy of existing office space remains low, current office tenants will probably renew their leases for less space—reducing office demand over time.”
The chart above accompanied the assessment. The same chart also made it into OFR’s 2023 annual report, which predicted office building demolitions were likely to occur for the less desirable office space. OFR wrote:
“High-quality space will likely outperform as the flight to quality continues, with high rents and low vacancy rates for best-in-class assets. However, second-generation space will struggle to backfill, with an increase in demolitions and conversions.”
A key entity that OFR keeps apprised of financial stability risks is the Financial Stability Oversight Council (F-SOC). It was also created under the Dodd-Frank financial reform legislation of 2010 to address the fact that financial regulators were wearing blinders when the 2008 financial crisis on Wall Street left the U.S. economy in tatters, with millions of Americans losing their jobs and their homes to foreclosure from tricked-up mortgages. F-SOC is chaired by the sitting U.S. Treasury Secretary and includes every federal banking and securities regulator. F-SOC wrote the following in its 2023 annual report:
“Commercial real estate (CRE) loans totaled almost $6 trillion as of the second quarter of 2023, and CRE represents a significant portion of the assets of many financial institutions. Banks hold a significant market share of CRE loans at 50 percent, with the rest held by various financial institutions such as insurance companies, holders of commercial mortgage-backed securities (CMBS), and debt funds. CRE is the largest loan category among almost one-half of U.S. banks, and more than one-quarter of U.S. banks have CRE loan portfolios that are large relative to the capital they hold.”
And this:
“The prices of office properties have deteriorated much more than those of other major property types in recent quarters, with an index of office property prices more than 30 percent below its pre-pandemic level as of September 2023.”
There is widespread agreement among federal banking regulators that commercial real estate in the office sector is a serious financial risk to banks. However, there is divergent opinion among two key regulators as to whether this risk is at the smaller banks or includes the largest banks — which pose an exponentially greater threat to financial stability.
On March 7, Fed Chair Jerome Powell appeared before the Senate Banking Committee to deliver his Semiannual Monetary Policy Report. In the Q&A that followed, Senator Catherine Cortez Masto (D-NV) raised the question with Powell about troubled real estate loans as a financial risk to banks.
Powell played down the real estate threat at the largest banks, stating: “There will be bank failures, but this is not the big banks. If you look at the very big banks, this is not a first order issue for any of the very large banks. It’s more smaller and medium size banks that have these issues.”
Powell might have his own agenda in playing down the risks to the mega banks on Wall Street. According to Senator Elizabeth Warren, who also sits on the Senate Banking Committee, Powell is leading the charge behind the scenes to overturn federal regulators’ proposal to require the largest banks to hold larger amounts of capital to prevent a replay of the taxpayer and Fed bailouts of these mega banks that occurred in 2008.
On the same day that Powell was testifying before the Senate Banking Committee, the Chair of the Federal Deposit Insurance Corporation (FDIC), Martin Gruenberg, was holding a press conference to release the FDIC’s latest quarterly “Banking Profile.” Gruenberg boldly revealed a serious real estate problem inside the largest banks, stating the following: (Go to 5 minutes and 12 seconds at this link.)
GRUENBERG: “The increase in noncurrent loan balances was greatest among CRE [Commercial Real Estate] loans and credit cards. Weak demand for office space has softened property values and higher interest rates are affecting credit quality and refinancing ability of office and other types of CRE loans. As a result, the noncurrent rate for nonowner occupied CRE loans is now at its highest level since first quarter of 2014, driven by portfolios at the largest banks.” (Bold emphasis added.)
According to the chart below and accompanying data provided in an Excel spreadsheet by the FDIC, past due loans on commercial real estate at the largest banks (those with more than $250 billion in assets) as of December 31 of last year are at 4.11 percent. That’s 1.66 percent higher than at the end of the fourth quarter of 2008 when banks were exploding all over Wall Street during the financial crisis. As the chart below indicates, commercial real estate problems quickly became a lot worse at the largest banks, with the past due rate reaching 7.97 by the end of the first quarter of 2010.
That 4.11 percent past due rate at the biggest banks on December 31, 2023 compares with a past due rate of 1.35 percent at banks with $10 billion to $250 billion in assets, according to the latest FDIC bank profile data. Banks with $1 billion to $10 billion in assets have a negligible past due rate of 0.64 percent.
According to a report at CommercialEdge, Central Business District (CBD) office buildings “have been hit the hardest by the changes.” They cite a Washington, D.C. 13-story building with ground-floor retail space that “sold for $18.2 million in 2023, down 70% from its 2017 price tag of $61.8 million.”
More Than Trump
Donald Trump has some competition for today’s most important legal news. First off, DOJ sued Apple, alleging that iPhone “monopoly power” violates antitrust statutes. DOJ is joined by 15 state attorneys general and district attorneys in the civil lawsuit, which accuses Apple of harming consumers by limiting competition.
Antitrust lawsuits are complicated, so DOJ tells a story in the opening paragraph of its complaint, which illustrates what the case is about: “In 2010, a top Apple executive emailed Apple’s then-CEO about an ad for the new Kindle e-reader. The ad began with a woman who was using her iPhone to buy and read books on the Kindle app. She then switches to an Android smartphone and continues to read her books using the same Kindle app. The executive wrote to Jobs: one “message that can’t be missed is that it is easy to switch from iPhone to Android. Not fun to watch.” Jobs was clear in his response: Apple would “force” developers to use its payment system to lock in both developers and users on its platform. Over many years, Apple has repeatedly responded to competitive threats like this one by making it harder or more expensive for its users and developers to leave than by making it more attractive for them to stay.” Cases like this take a long time—years—to play out unless one or both sides are highly motivated to work towards a settlement, so don’t expect to see any quick resolution on this one. If you want to take a look at the complaint in the meantime, you’ll find it here: https://s3.documentcloud.org/documents/24492020/doj-apple-antitrust-complaint.pdf That’s not all DOJ has been busy doing. Six former Mississippi law enforcement officers were sentenced to prison this week for torturing and abusing two Black men in Rankin County, Mississippi. Federal Judge Tom Lee sentenced the defendants to terms in prison ranging from 10 to 40 years. For comparison, Derek Chauvin, the former police officer who murdered George Floyd was sentenced to 21 years in prison, which gives you a sense of how serious the Mississippi case is. The defendants kicked in the door of a home where two Black men were residing without a search warrant and then handcuffed them and tased them while taunting them with racial slurs. One of the defendants fired his gun in the mouth of one of the victims, breaking his jaw. After that and while the victim lay bleeding on the floor, the defendants stepped aside to coordinate their cover up story. According to court documents, the defendants admitted to being part of a self-described “Goon Squad” of Rankin County, Mississippi, law enforcement officers who were known for using excessive force and not reporting it. One of the leaders warned the others in advance of their raid, “No bad mugshots,” a warning that they should be careful not to leave any injuries that would show up in a mugshot. The charged case was not the only instance of criminal conduct by the former law enforcement officers. The Justice Department’s Civil Rights Division continues to quietly do the people’s work in the parts of the country where they are most needed. Of course, there is also Trump legal news today. In preparation for Tuesday, when she can begin collection efforts if Trump fails to get a bond by Monday, New York Attorney General Tish James formally registered the judgment against him in Westchester County, New York, just outside Manhattan, earlier this month. That could signal that James is looking at possible seizures of properties Trump has there including Trump National Golf Course in Briarcliff Manor and Seven Springs. Trump has to be frustrated by James’ unrelenting pursuit of justice. Meanwhile, Judge Engoron issued an order today to create an “enhanced monitorship” of the Trump Organization for three years, putting it in the hands of the existing monitor, retired Judge Barbara Jones. Trump will have to provide her with information about day-to-day operations that she didn’t previously have access to. Among Jones’ new tasks is preparing a report that describes current internal controls and recommends proper ones to ensure the long-term fraud comes to a stop. Jones now makes the rules for Trump’s preparation of financial disclosures to third parties, reviews his monthly bank statements, and pre-approves transactions involving more than $5 million in assets. The Trump Organization also has to inform Judge Jones of any efforts to obtain a surety bond. If she observes “any material misstatements, misrepresentations, or omissions,” she is to immediately report them to the Court. Overall, the order gives the impression that Judge Engoron is serious about making sure that there is meticulous oversight of the Trump Organization going forward.
Back in November 2022, when the Judge asked Trump’s lawyers and the Attorney General’s office for the names of possible monitors to oversee Trump’s business activities while the litigation was ongoing, both sides suggested Jones, a highly respected retired federal judge. That makes it tough for Trump to credibly complain that Jones is biased against him. In Manhattan, it looks like Trump’s complaints about discovery violations by prosecutors in the criminal case are falling apart now that the District Attorney has had the opportunity to respond. It’s complicated because it’s the Manhattan DA that is prosecuting Trump, not federal prosecutors who have an obligation to provide Trump with discovery materials. But because the DA’s office suspected the feds would have some documents with bearing on their case, particularly ones about statements made by Michael Cohen, a witness for the DA who was formerly prosecuted by the U.S. Attorney’s Office for the Southern District of New York, they went to them over a year ago with a request for anything they could turn over. The DA provided Trump with those items. But then Trump sent a subpoena to the U.S. Attorney’s Office that resulted in a mountain of documents being produced earlier this month and allegations by Trump of misconduct. It turns out that there were fewer than 300 new documents in the materials federal prosecutors sent Trump and the key point is that they weren’t in that office’s possession when the Manhattan DA’s office made their request earlier. The documents were part of the investigation conducted by Special Counsel Mueller and were only recently sent to the Southern District by another office. Today, the Manhattan DA wrote to the Judge that “Enough is enough. These tactics by defendant and defense counsel should be stopped. A Grand Jury of regular New Yorkers indicted Donald Trump on thirty-four felony counts of falsifying business records to conceal criminal efforts to corrupt the 2016 presidential election. This Court held that the evidence supported those charges. The People respectfully urge this Court to reject defendant's motion in its entirety.” They continued, suggesting that the case should go to trial on the schedule suggested by the Court last week, which would mean somewhere around April 15, and that “Defendant's motion and subsequent filings are a transparent attempt to shift the focus away from his own criminal conduct by pursuing remedies to which he is not entitled, including dismissal, a lengthy adjournment, and preclusion of evidence.” It doesn’t look like Trump has anything substantial here. We’ll watch to see if there’s anything but shouting left for the hearing on Monday, but unless there is more, expect the Judge to reset trial in this case in the next future, maybe on April 15, the date he suggested in his letter last week. Tax day is usually pretty gloomy, but this year, it could be a big day in court. That’s where we are as we approach the end of the week. We’re in this together, Joyce |
Top News | 'He’s Not Going to Run Unopposed': Sanders Rejects Schumer for Majority Leader
LOTS OF POSTS IGNORED BY BLOGGER..... OR REMOVED ON THEIR WHIM! ALL POSTS ARE...
-
LOTS OF POSTS IGNORED BY BLOGGER..... OR REMOVED ON THEIR WHIM! ALL PO...
-
LOTS OF POSTS IGNORED BY BLOGGER..... OR REMOVED ON THEIR WHIM! ...
-
LOTS OF POSTS IGNORED BY BLOGGER..... OR REMOVED ON THEIR WHIM! A...
