Bond giant PIMCO sees another wave of bank failures coming amid increasing problems with commercial mortgages

• “The real wave of distress is just beginning” in commercial real estate debt, Pimco’s John Murray told Bloomberg.

• He warned that the high demand for commercial real estate loans could lead to an increase in bank failures.

• Larger banks and non-bank debt funds should also be kept in mind.

A “very high” concentration of distressed commercial real estate loans will lead to another wave of bank failures, John Murray, global head of real estate at Pimco, told Bloomberg.

“The real wave of hardship is just beginning,” Murray said.

Since the sharp rise in interest rates two years ago, the commercial real estate market has been in the spotlight as doubts grow about the ability of property owners to refinance their debt.

With borrowing costs rising and demand falling, defaults have risen across the sector, particularly in office buildings struggling with the trend towards remote working.

This week, Fitch Ratings revised upward its forecasts for delinquencies in the office sector to 8.4 percent and 11 percent for 2024 and 2025, respectively.

The sector's main lenders have been midsize regional banks, and Wall Street has grown concerned about the potential fallout. Regional banks that entered the real estate sector have seen their assets fall to a fraction of their peak, according to Bloomberg.

“However, as the number of non-performing loans increases due to their maturity, we expect banks to begin selling these more impaired loans to reduce their exposure to problem loans,” Murray said, adding that Pimco has been stocking up on loans sold by other institutions.

The distress is already being felt in the markets. Earlier this month, Axos Financial shares fell 15 percent after a short seller targeted the bank's exposure to commercial real estate loans. New York Community Bancorp shares plunged in February after its unexpected quarterly loss was partly attributed to its exposure to the real estate market.

Meanwhile, large dealers benefit from some protection because their commercial real estate lending capacity has been limited by regulation since 2008, Murray told Bloomberg. But despite these guardrails, larger lenders are pulling out of the industry amid rising default rates, he noted.

At the same time, a recent study found that major banks may be more exposed to a potential collapse than commonly thought because they indirectly lend through lines of credit to real estate investment trusts. These funds are also reeling under the weight of the real estate sector as REIT investors are rapidly withdrawing.

Murray added that non-bank U.S. debt funds also pose a problem, as they are responsible for more than $200 billion in loans that are due next year.

Read the original article on Business Insider